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THE-A  B  C  OF  THE  FEDERAL 
RESERVE  SYSTEM- 


WHY  THE  FEDERAL  RESERVE  SYSTEM  WAS 
CALLED  INTO  BEING,  THE  MAIN  FEATURES 
OF  ITS  ORGANIZATION,  AND  HOW.IT  WORKS 


EDWIN  WALTER  KEMMERER,  Ph.D. 

PROFESSOR  OF  ECONOMICS  AND  FINANCE 
IN  PRINCETON  UNIVERSITY 


WITH  A  PREFACE  BY 
BENJAMIN  STRONG,  LL.D. 

Governor  of  the  Federal  Reserve  Bank  of  New  York 


PRINCETON  UNIVERSITY  PRESS 
PRINCETON 

LONDON:  HUMPHREY  MILFORD 

OXFORD  UNIVERSITY  PRESS 

1918 


.■> 


Pbtncbton  University  Press 
Princeton,  N.  J. 

Published  September,  1918 
Printed  in  the  United  States  of  America 


'i^  7  \  ' 


y 


CONTENTS 

PAGES 

Preface.     By  Bek jamin  Strong ix-xiii 

CHAPTER  I 

Purpose  and  Plan  1-2 

Lack  of  familiarity  with  federal  reserve  system  on  part 
of  public,  and  its  dangers,  1. — Purpose  of  book,  2. — 
Plan  of  book,  2. 

CHAPTER  n 
Decentralization  of  American  Banking  Prior  to  Federal 

Reserve  System 3-7 

Banks  lacked  organization  and  effective  leadership  in 
time  of  crisis,  3-4. — Reserves  widely  scattered,  4-6. — Re- 
serves immobile,  7.. 

CHAPTER  in 
Inelasticity  of  American  Bank  Credit  Prior  to  Federal 

Reserve  System .■^. » .  .T. . . '. 8-18 

Extent  to  which  bank  credit  is  used  as  a  medium  of 
exchange,  8-10. — Why  circulating  bank  credit  should  be 
elastic,  10-11. — Bank-note  inelasticity  over  long  periods  *^ 
under  old  banking  system,  11-13. — Seasonal  inelasticity 
of  bank  notes,  13-15. — Banl^-note  inelasticity  in  times  of 
crisis,  15-17. — Inelasticity  of  deposit  cr'edit,  17. — Evil  re- 
sults of  credit  inelasticity,  18. 

CHAPTER  IV 

Defective  Exchange  and  Transfer  System  19-24 

The  "float"  and  the  practice  of  routing  checks,  19-21. — 
Checks  in  transit  commonly  counted  as  legal  reserve 
money,  21-22. — Large  domestic  shipments  of  currency  re- 
quired under  old  banking  regime,  22-23. — Foreign  exchange 
difficulties,  23-24. 

CHAPTER  V 

Defective  Banking  Machinery  for  Federal  Government.  25-27 
Difficulty  of  apportioning  gcTVernment  funds  among  nine 
sub-treasuries  and  over  fifteeen  hundred  depositary  banks, 
25-26. — Four  evil  results  of  practice,  26-27. — Summary  of 
defects  of  old  banking  system,  27. 

V 


vi  CONTENTS 

PAGES 

CHAPTER  VI 
How  THE  Federal  Reserve  System  is  Remedying  the  Old 
Evil  of  the  Decentralizatiok  of  American  Banking.  .  2&-49 

Division  of  country  into  twelve  federal  reserve  dis- 
tricts, 28-^.— ^Membership  in  federal  reserve  system, 
29-31. — Democracy  of  federal  reserve  banks'  plan  of  or- 
ganization, 31-33. —  Coordination  of  twelve  federal  reserve 
banks  and  centralization  of  their  control  provided  for  by 
means  of  federal  reserve  board,  advisory  council,  and  class 
C  directors  of  federal  reserve  banks,  33-35. — District  cen- 
tralization of  bank  reserves,  35-38. — Mobilization  of  re- 
serves, 38-39. — Inter-district  mobility  of  reserves,  39. — 
'  Rediscounting  by  one  federal  reserve  bank  for  another, 
39-41. — Open-market  operations,  41-44. — ^Creation  of  a 
broader  discount  market  for  commercial  paper,  44. —  In- 
creasing use  of  the  trade  acceptance,  and  advantages  of 
trade  acceptance  over  open-book  account  credit,  44-46. — 
The  bank  acceptance,  46-47. — ^Inter-district  mobility  of 
reserves  promoted  by  increasing  use  of  trade  accecptances 
and  bank  acceptances,  47-48. — ^Intra-district  mobility  of 
reserves  increased  by  federal  reserve  system,  48-49. 

CHAPTER  VII 

Credit  Elastictty  under  the  Federal  Reserve  System 50-65 

Provisions  of  federal  reserve  act  for  bond-secured 
national  bank  notes,  50-51. — The  federal  reserve  bank 
note,  51.-»^ederal  reserve  notes,  51-52. — ^Their  elasticity, 
52-57. — Elasticity  of  deposit  currency  obtained  in  a  num- 
ber of  ways:  Removal  of  old  rigid  legal  reserve  require- 
ments, 57-58.  New  legal  reserve  requirements  less  rigid 
and  may  be  suspended  in  times  of  emergency,  58-61. 
Privilege  of  rediscounting  at  federal  reserve  banks,  61- 
62.  Privilege  of  borrowing  on  collateral  notes  with  short 
maturities,  62-63. — Contractility  of  circulating  credit  un- 
der federal  reserve  system,  64-65. 

CHAPTER  VIII 
Domestic  and  Foreign  Exchange  under  the  Federal  Re- 
serve System 66-81 

Provisions  of  federal  reserve  law  concerning  domestic 
exchange,  66-69. — Early  experiments  of  the  federal  reserve 
authorities  as  regards  the  clearing  and  collection  of 
checks,  69-70. — Present  clearing  and  collection  system, 
70-75.— The  gold  settlement  fund,  76-79.— Foreign  ex- 
change under  the  new  banking  system,  79-81. 


CONTENTS  vii 


CHAPTER  IX 
The  Federal  Reserve  System  and  the  Federal  Treasury.  .  82-88 
Federal  reserve  banks  authorized  by  law  to  be  deposi- 
taries of  government  funds,  82-83. — Extensively  used  as 
depositaries  by  Secretary  of  the  Treasury,  83-87. — Fed- 
eral reserve  banks  as  fiscal  agents  of  Government  render 
invaluable    services    in    the   financing   of    the   war,    88. — 
President  Wilson's  appeal  to  non-member  banks  to  join 
federal   reserve   system    as    a   matter   of   patriotic   duty    ^ 
89-90.  J-^ 

APPENDIX  A 
Combined    Balance    Sheet   of    Twelve    Federal    Reserve 
Banks  as  of  March  28,  1918,  and  Brief  Explanations 
OF  THE  Various  Items 92-95 

APPENDIX  B  ' 
Federal  Reserve  Act  as  Amended  to  May  1,  1918,  With  a 
Marginal   Index  and   with    Citations   of   Amendatory 
Acts    96-159 

APPENDIX  C 

Provisions  of  the  Farm  Loan  Act,  Approved  July  17,  1916, 
which  affect  Federal  Reserve  Banks  and  Member 
Banks  of  the  Federal  Reserve  System  160-162 

APPENDIX  D 
Section  7  of  "An  act  to  Authorize  an  Issue  of  Bonds  to 
Meet   Expenditures   for  the    National    Security   and 
Defence,      .     .     .     Approved  April  24,  1917,  which  Af- 
fects Federal  Reserve  Banks  and  Member  Banks  of  the 

Federal  Reserve  System"   163-164 

Index  to  Federal  Reserve  Act  and  its  Amendments 165-167 

Index  to  Text  of  Book 178-182 


PREFACE 

By 

Benjamin  Strong,  LL.D. 

Governor  of  the  Federal  Reserve  Bank  of  New 

York 

The  federal  reserve  banks  came  into  being  in 
the  month  of  November,  1914.  The  passage  of 
the  legislation  by  which  they  were  created  had 
been  preceded  by  five  years  of  discussion,  fol- 
lowing the  financial  upheaval  of  the  fall  of  1907, 
such  as  might  have  been  expected  to  prepare  the 
way  for  the  considerable  changes  in  banking 
methods  contemplated  by  the  new  law. 

Notwithstanding,  however,  that  American 
bankers  had  gained  a  better  understanding  of  the 
deplorable  defects  in  the  American  banking  and 
currency  system,  the  managers  of  the  new  fed- 
eral reserve  banks  soon  found  that  the  welcome 
accorded  to  them  by  the  banks  of  the  country 
was,  to  say  the  least,  cool.  Business  men  gener- 
ally welcomed  the  change  for  the  better,  recogniz- 
ing the  protection  which  the  reserve  system  af-' 
forded  them;  but  nevertheless  both  bankers  and 

ix 


X  PREFACE 

business  men  were  regrettably  ignorant  of  what 
it  all  meant. 

It  was  the  influence  of  the  war  which  demand- 
ed that  the  federal  reserve  banks  be  organized  as 
promptly  as  possible.  The  best  banking  ma- 
chinery and  the  best  banking  talent  in  the  coun- 
try seemed  to  be  required  to  protect  the  interests 
of  both  bankers  and  business  men.  Much  was 
expected  from  the  new  system,  once  it  was  start- 
ed. Very  shortly,  however,  immense  imports  of 
gold  from  abroad,  general  business  prosperity 
stimulated  by  war  profits,  and  reasonably  com- 
fortable conditions  in  credit  and  banking,  ap- 
peared to  put  the  federal  reserve  banks  for  the 
first  two  and  one-half  years  of  their  existence  in- 
to the  class  of  expensive  luxuries;  in  fact,  they 
were  regarded  as  examples  of  governmental  in- 
terference with  business  which  were  tolerated 
but,  nevertheless,  were  not  appreciated  by  many 
bankers. 

During  this  interval,  November,  1914,  to 
April,  1917,  the  system,  by  slow  stages  of  prog- 
ress, found  itself.  The  machinery  for  conduct- 
ing actual  operations  was  designed  and  developed 
far  beyond  the  requirements  of  the  moment.  The 
terms  of  the  Act  were  perfected  where  need  was 
discovered,  the  men  engaged  in  the  work  became 
better  acquaint'ed  with  their  duties  and  with  each 


PREFACE  xi 

other,  skilled  clerks  were  engaged  and  trained, 
and  accounting  methods  were  perfected,  so  that 
when  the  test  came  as  a  result  of  our  entry  into 
the  war,  in  April,  1917,  the  Federal  Reserve 
banks  were  in  large  measure  prepared  for  the 
grave  tasks  and  responsibilities  at  once  to  be  as- 
sumed. 

During  these  first  twelve  months  of  our  coun- 
try's participation  in  the  war  the  reserve  system 
has  become  established  upon  a  basis  of  confidence 
and  respect,  even  in  fact  of  admiration,  among 
both  bankers  and  business  men;  and  its  future 
therefore  seems  assured  so  long  as  good  manage- 
ment deserves  the  support  now  enjoyed. 

During  these  three  and  one-half  years,  how- 
ever, the  work  of  organization,  and  during  the 
last  year  the  work  assumed  by  the  Federal  Re- 
serve banks  as  fiscal  agents  of  the  Government, 
have  so  occupied  the  time  of  all  connected  with 
the  system  that  it  has  been  difficult  to  overcome, 
in  a  comprehensive  way,  much  of  the  ignorance 
and  misunderstanding  of  the  functions  of  the 
system.  It  is  widely  accepted  as  successful  and 
necessary,  but,  with  some  exceptions,  it  is  still 
hardly  possible  to  say  that  it  is  understood.  It 
has  come  as  an  enlargement  of  the  scope  of  a 
great  banking  machine  which  had  become  com- 
plicated by  the  dual  development  of  two  classes 


xii  PREFACE 

of  banks,  national  and  state;  and,  in  the  case  of 
state  banks,  a  development  which  covered  a  vast 
field  of  business  activity  not  confined  to  commer- 
cial banking.  Under  the  influence  of  the  new 
system  of  twelve  closely  allied  banks  of  reserve 
and  of  discount,  the  tendency  will  be  toward  uni- 
fication and  simplicity  which  will  be  brought 
about  by  the  state  institutions,  in  increasing  num- 
bers, becoming  stockholders  and  depositors  in 
the  reserve  banks. 

Until,  however,  through  evolution  in  methods 
and  many  changes  in  both  state  and  national 
laws,  we  have  a  truly  unified  system,  banking  in 
this  country  will  be  a  puzzle  and  a  mystery  to  the 
casual  observer,  to  the  business  man,  and  to 
bankers  abroad,  unless  its  various  features  are 
presented  in  a  concise  and  comprehensive  form, 
stripped  of  the  technicalities  of  economic  discus- 
sion. It  is  much  more  difficult  to  present  a  com- 
plex problem  in  concise  form  than  in  extended 
detail.  This  task,  however.  Professor  Kemmerer 
has  undertaken  with  distinct  success.  An  ac- 
count of  the  functions  assumed  by  the  federal 
reserve  banks  as  fiscal  agents  of  the  United 
States  Government,  and  of  the  handling  of  war 
bonds,  certificates  of  indebtedness  and  govern- 
ment funds  would  have  complicated,  and,  pos- 
sibly, rendered  less  clear  the  description  of  the 


PREFACE  xiii 

position  the  federal  reserve  system  occupies  in  the 
banking  field.  It  would  have  involved,  further, 
a  discussion  of  the  long  felt  necessity  for  a  modi- 
fication of  the  independent  treasury  system. 
These  subjects,  therefore,  have  properly  not  been 
enlarged  upon. 

It  is  a  public  service  to  undertake  the  difficult 
task  of  preparing  an  account  of  this  great  change 
in  our  fiscal  system  so  as  to  combine  accuracy 
with  a  comprehensive  survey  of  the  subject  and, 
at  the  same  time,  to  avoid  technical  details.  All 
that  is  required  to  give  the  reader  an  understand- 
ing of  the  fundamentals  of  the  new  regime  of 
American  banking  is  contained  in  the  following 
pages,  which  will  be  read  with  attention  and  in- 
terest by  many  who  have  been  seeking  this  infor- 
mation during  the  past  three  and  one-half  years. 

Federal  Reserve 

Bank  of  New  York, 

May  28,  1918. 


THE  A   B  C  OF   THE    FEDERAL 
RESERVE  SYSTEM 

CHAPTER  I 
Purpose  and  Plan  of  !&ook 

This  book  is  an  attempt  to  set  forth  in  non-  t\ 
technical  language  the  chief  reasons  why  the  fed- 
eral reserve  system  was  called  into  being,  the 
main  features  of  its  organization,  and  how  it* 
works.  Although  the  federal  reserve  act  of  1913 
is  one  of  the  most  important  pieces  of  financial 
legislation  enacted  in  modern  times,  and  although 
it  has  been  in  operation  several  years,  compara- 
tively few  people  are  f amihar  with  its  elementary 
principles.  It  is  looked  upon  by  the  majority  of 
people  as  too  technical  and  complicated  a  matter 
to  be  imderstood  by  persons  other  than  bankers 
and  economists.  As  a  consequence  there  has  been 
a  surprising  lack  of  public  interest  in  the  work- 
ings of  the  system  and  in  the  important  legisla- 
tive and  administrative  modifications  which  the 
system  has  undergone  since  its  establishment. 
This  unfamiliarity  is  not  surprising  when  one 
considers  the  "complex  character  of  much  of  the 


2  FEDERAL  RESERVE  SYSTEM 

federal  reserve  machinery  and  the  technical  lan- 
guage in  which  this  machinery  is  usually  de- 
scribed. In  a  democracy,  however,  widespread 
ignorance,  among  the  voters,  of  the  country's 
financial  system  is  fraught  with  danger. 

America's  leading  manufacturing,  transporta- 
tion and  commercial  concerns  years  ago  attained 
heights  of  economic  efficiency  which  made  them 
the  envy  of  foreigners.  None,  however,  envied 
us  our  banking  system.  None  followed  it  except 
soon  regretfully  to  turn  back.  This  was  true, 
despite  the  fact  that  our  old  American  banking 
system  had  many  substantial  merits.  It  was 
reasonably  safe,  it  yielded  good  profits,  it  was 
adaptable  to  the  local  needs  of  widely  varying 
communities,  and  it  developed  the  check  and 
clearing  system  to  a  degree  of  perfection  found 
in  few  if  any  other  countries.  Along  with  these 
meritorious  features,  however,  it  contained  a 
number  of  vfery  serious  defects.  The  chief  of 
these  may  be  grouped  conveniently  under  four 
heads:  I.  Decentralization.  II.  Inelasticity  of 
credit.  III.  Cumbersome  exchange  and  transfer 
system.  IV.  Defective  organization  as  regards 
relationship  with  federal  treasury.  In  the  four 
succeeding  chapters  these  four  groups  of  defects 
will  be  considered,  and  in  the  following  four  chap- 
ters will  be  discussed  the  respective  remedies  pro- 
vided by  the  federal  reserve  system. 


CHAPTER  II 

Decentralization    of    American    Banking 
Prior  to  Federal  Reserve  System 

In  1912  the  United  States  had  many  times 
more  commercial  banks  than  any  other  country 
in  the  world,  and  these  banks  averaged  much 
smaller  than  those  of  any  other  important  coun- 
try. Official  figures  at  that  time  placed  the  num- 
ber of  independent  banking  establishments  of  all 
kinds  in  the  United  States  at  approximately  30,- 
000,  and  of  this  number  something  like  28,000 
were  banks  whose  business  was  wholly  or  partly 
of  a  commercial  character.  These  commercial 
banks  were  owned  for  the  most  part  by  the  resi- 
dents of  the  communities  in  which  they  were 
placed,  and  the  business  of  most  of  them  was 
chiefly  local  in  character.  The  great  majority  of 
national  banks  were  national  in  nothing  but  name. 
Except  for  the  rather  loose  association  of  the 
banks  in  the  clearing  houses  of  our  principal  cities 
and  a  growing  community  of  interest,  most  of 
these  banks  were  independent  units,  each  work- 
ing for  itself.    There  was  little  team  work.    In 

3 


4  THE  A  B  C  OF  THE 

times  of  threatened  panic  the  different  parts  of 
the  system  worked  at  cross  purposes.  They  were 
without  effective  leadership  at  those  times  when 
prompt  cooperation  under  national  leadership 
was  urgently  needed. 

Reserves  Scattered 

The  most  serious  feature  of  this  decentraliza- 
tion was  the  scattering  of  reserves.  Thirty  thou- 
sand different  banks  meant  30,000  cash  reserves, 
and  these  reserves  for  the  commercial  banks  were 
more  than  the  mere  "till  money"  which  the  "cash 
balances"  of  most  foreign  banks  represent.  They 
were  actual  reserves,  substantial  in  amount,  upon 
which  the  banks  placed  their  prime  dependence 
for  times  of  emergency.  It  is  true  that  most 
banks  had  so  called  "deposited  reserves,"  name- 
ly, funds  on  deposit  in  other  banks,  which  they 
were  allowed  to  coimt  as  part  of  their  "legal 
reserves" ;  and  they  had  so  called  "secondary  re- 
serves," namely,  funds  invested  in  securities  and 
call  lo^ns,  which  were  supposed  to  be  quick  assets 
that  could  be  liquidated  at  once  in  time  of  need. 
Strictly  speaking,  however,  neither  of  these  "re- 
serves" was  a  reserve  at  all.  The  deposited  re- 
serve was  after  all  merely  a  deposit  in  another 
bank,  which  the  depository  bank  loaned  out — 
commonly  at  call  on  the  stock  exchange — and 


FEDERAL  RESERVE  SYSTEM  6 

against  which  it  held  its  own  reserve,  a  reserve 
which  in  turn  was  often  further  attenuated  by 
being  placed  on  deposit  in  a  third  bank,  there 
again  to  be  loaned  out  on  stock  exchange  collat- 
eral. In  times  of  emergency,  therefore,  the  "de- 
posited reserve"  could  be  realized  upon  only  to..,^ 
the  extent  that  call  loans  could  actually  be  called, 
and  this  meant  to  the  extent  that  stock  exchange 
securities  could  be  sold.  Invested  "secondary  re- 
serves" could  be  realized  upon,  likewise,  only  to 
the  extent  that  securities  could  be  sold.  In  times 
of  threatened  panic,  however,  stocks  and  bonds 
can  not  be  sold  on  any  extensive  scale  except  at 
great  sacrifices  and  at  the  risk  of  financial  col- 
lapse. Experience  has  shown  that  securities  are 
not  sold  to  any  large  extent  by  banks  at  such 
times.  The  losses  involved  would  be  too  great. 
The  result  was  that  in  times  of  serious  danger  the 
banks  of  the  country  were  forged  to  rely  to  a 
very  large  extent  upon  their  own  cash  reserves, 
which,  as  a  consequence,  had  to  be  maintained  at 
a  high  level — higher  than  in  other  advanced 
countries.  This  situation  gave  the  vault*  reserve 
in  American  commercial  banks  an  importance 
not  found  in  the  commercial  banks  of  Europe. 
European  joint-stock  banks  normally  carry  little 
cash  in  vault;  they  place  their  reliance  for 
emergency  funds  directly  or  indirectly  upon  the 


6  THE  A  B  C  OF  THE 

central  banks.  In  America  bank  reserves  were  so 
scattered  and  so  jealously  guarded  that  in  times 
of  threatened  panic  they  were  comparatively  in- 
effective in  staying  the  storm.  The  situation  was 
analogous  to  what  would  happen  today  if  after 
drilling  our  American  army  to  a  high  point  of 
fighting  efficiency,  we  should  scatter  the  men  in 
small  units  all  over  the  United  States  to  protect 
the  country  from  a  threatened  invasion.  ]Each 
community  would  be  jealous  of  its  own  squad  of 
soldiers,  but  the  invader  would  come  and  the  effi- 
ciency of  our  well  drilled  soldiers  would  be  prac- 
tically nil.  The  point  of  the  illustration  will  be 
clear  to  everyone  recalling  the  mad  scramble  for 
reserve  money  on  the  part  of  banks  throughout 
the  country  at  the  time  of  the  panic  of  1907*  Our 
supply  of  reserve  money  was  large.  In  fact  we 
had  at  that  time  in  the  United  States  the  largest 
supply  of  gold  in  the  world.  It  was  ineffective, 
however,  because  widely  scattered;  hence,  sus- 
pension of  cash  payments  throughout  the  coun- 
try, currency  premiums,  the  breakdown  of  our 
domestic  exchanges,  the  illegal  issue  of  millions 
of  dollars  of  money  substitutes,  and  all  the  other 
disgraceful  accompaniments  of  an  American 
panic. 


FEDERAL  RESERVE  SYSTEM  7 

Reserves  Immobile 

Obviously  a  country's  reserve  money  must  to 
a  large  extent  be  concentrated  in  one  reserve  or, 
at  most,  in  a  few  large  reserves,  if  it  is  to  be  ef- 
fective. It  must  be  marshalled  in  armies,  not 
scattered  in  small  squads.  But  these  armies  must 
be  mobile  so  that  they  can  be  quickly  moved 
singly  or  in  combinations  to  places  of  threatened 
attack.  An  army's  mobility  is  a  big  factor  in  its 
efficiency — a  truth  which  the  great  mobility  of 
the  armies  of  the  Central  Powers  in  the  present 
war  has  emphasized.  Our  American  bank  re- 
serves were  not  only  scattered,  they  were  also  im- 
mobile. There  was  no  effective  way  of  quickly 
gathering  them  together  and  massing  them  at  the 
points  of  financial  danger. 

These  then  were  the  three  most  serious  phases 
of  our  banking  decentralization :  ( 1 )  Absence  of 
a  responsible  national  conservator  of  our  money 
market,  like  the  Bank  of  France  or  the  Bank  of 
England.  (2)  Scattered  bank  reserves.  (3) 
Immobile  bank  reserves. 


CHAPTER  III 


I 


Inelasticity  of  American  Bank  Credit  Prior 
TO  Federal  Reserve  System 

The  second  group  of  defects  of  the  old  bank- 
ing system,  defects  closely  related  to  those  of  de- 
centralization, were  those  of^^credit  inelasticity. 
A  very  large  part  of  the  country's  current  Busi- 
ness is  carried  on  by  means  of  funds  borrowed 
from  commercial  banks.  These  borrowed  funds 
are  left  on  deposit  with  the  banks,  and  the  de- 
posits are  circulated  by  means  of  checks,  the 
debits  and  credits  of  individual  accounts  being 
offset  in  such  a  way  that  the  total  commercial  de- 
posits of  the  country  do  not  normally  vary 
greatly  in  short  periods  of  time. 

Extent  to  which  Bank  Credit  is   Used  as 
Medium  of  Exchange 

The  point  may  be  illustrated  by  a  few  figures, 
and,  inasmuch  as  conditions  have  been  very  ab- 
normal since  the  outbreak  of  the  European  War, 
the  figures  used  will  be  those  for  the  year  1913^ 
Reports  made  to  the  Comptroller  of  the  Cur- 

8 


FEDERAL  RESERVE  SYSTEM  9 

rency  show  that  on  June  4,  1913,  the  loans  and 
discounts  of  commercial  banks  which  reported  to 
the  Comptroller  (exclusive  of  loans  classified  as 
real-estate  loans)  amounted  to  approximately 
8j  billion  dollars.  Estimates  made  by  Profes- 
sor Irving  Fisher  give  a  rate  of  deposit  turn- 
over for  the  United  States  in  1913  of  approxi- 
mately 54,  which  means  that  for  each  check- 
deposit  balai\ce,  maintained  in  a  commercial 
bank,  averaging  throughout  the  year  $1,000, 
approximately  $54,000  in  checks  were  drawn  and 
paid.  The  average  deposit  balance  of  8  J  billions 
dollars  would  niean  therefore  check  transactions 
to  the  extent  of  54  times  8|  billions  dollars  or 
472  billions  dollars  in  1913.  Investigations  made 
for  the  National  Monetary  Comnyssidn  in  1909 
by  Professor  David  Kinley  showed  that  between 
80  and  85  per  cent  of  the  country's  total  business 
was  transacted  by  means  of  checks.  If  we  accept 
the  latter  figure  as  the  more  representative  one 
for  1913,  we  arrive  at  83  bilHons  dollars  (namely, 
15/85  of  the  amount  of  business  done  by  means 
of  checks),  as  the  amount  of  business  in  that 
year  performed  by  means  of  cash.  In  June, 
1913,  of  the  total  amount  of  money  in  circulation 
in  the  United  States,  21  per  cent,  or  $716  millions 
consisted  of  bank  notes.  Although  from  the 
public's  point  of  view  bank  notes  are  money,  from 


10  THE  A  B  C  OF  THE 

the  issuing  bank's  point  of  view  they  are  a  form 
of  bank  credit.  If  we  treat  them  as  a  form  of 
bank  credit,  and  add  to  the  $472  biUions  of  check 
business  21  per  cent  of  the  $83  bilhons  of  money- 
business  we  arrive  at  approximately  490  biUion 
dollars  worth  of  business  in  1913,  representing 
88  per  cent  of  the  country's  total  business  trans- 
actions, as  the  amount  performed  by  means  of 
bank  credit — checks  and  bank  notes. 

The  amount  of  money  and  of  deposit  currency 
which  a  country  needs  to  carry  on  its  business,  at 
a  price  level  in  equilibrium  with  the  price  levels 
of  other  countries,  depends  largely  upon  the 
amount  of  business  or  of  money  work  to  be  done. 
In  years  of  active  business  a  larger  supply  of 
circulating  media  is  needed  than  in  years  of  busi- 
ness depression.  Furthermore,  in  a  country  like 
the  United  States,  in  which  agriculture  is  a  par- 
ticularly important  industry,  there  are  very  pro- 
nounced seasonal  fluctuations  in  the  amount  of 
business  to  be  done,  and  consequently  in  the  de- 
mand for  cash  and  for  deposit  currency.  One 
important  postulate  of  a  good  banking  system  is 
its  capacity  to  adjust  the  supply  of  deposit  and 
bank-note  currency  to  variations  in  trade  de- 
mands, increasing  it,  for  example,  at  the  time  of 
the  heavy  crop-moving  demands  in  the  fall  and 
reducing  it  at  the  time  of  the  period  of  inactive 


I 


FEDERAL  RESERVE  SYSTEM  11 

business,  which  normally  sets  in  shortly  after  the 
opening  of  the  new  year.  Capacity  to  contract 
the  circulating  media  when  business  demands  de- 
cline is  as  important  as  capacity  to  expand  them 
when  these  demands  increase. 

Under  the  old  regime  our  American  bank 
credit,  both  note  and  deposit,  was  peculiarly  in- 
^astic; "although  the  seasonal  character  of  much 
of  the  country's  business  is  such  as  to  make  credit 
elasticity  a  desideratum  of  unusual  importance  in 
the  United  States. 

Bank-Note  Inelasticity 

Our  national  bank  notes,  which  should  have 
furnished  the  elastic  element  in  the  country's 
hand  to  hand  money,  were  notoriously  inelastic. 
National  banks  were  authorized  to  issue  these 
notes  by  depositing  with  the  Govemment^United 
States  bonds  equaUi]uj)aiLJKalue  to  the  notes  isr 
sy^.^  The  banks  were  supposed  to  realize  a 
"double  profit"  on  the  bank  notes,  namely,  in- 
terest  on  the  bonds,  and  interest  on  the  notes 
when  theywereioaiiedjnit  as  money.  After  1900 
fFe~¥onS^iised,  however,  were  mostly  two  per 
cent  bonds  of  1930,  and  as  the  issue  of  bank  notes 

1  If  the  market  value  were  below  the  par  value,  additional 
bonds  were  to  be  deposited  so  as  to  make  the  market  value  at 
least  equal  to  the  notes  issued.  In  recent  years  the  market  value 
of  these  bonds  has  been  usually  above  the  par  value. 


12  THE  A  B  C  OF  THE 

involved  a  number  of  incidental  expenses,  includ- 
ing a  semiannual  tax  of  one-fourth  of  one  per 
cent  upon  the  amount  of  notes  issued,  the  double 
profit  was  usually  not  a  very  substantial  one. 
Inasmuch  as  not  more  than  $100  in  notes  could 
be  issued  against  $100  par  value  of  bonds  regard- 
less of  how  high  a  premium  the  bonds  bore  in  the 
market,  and  inasmuch  as  the  bonds  had  been  in 
recent  years  practically  always  at  a  substantial 
premium,  the  banks  usually  realized  considerably 
less  than  Ij  per  cent  net  interest  on  the  bonds. 
Obviously  the  higher  the  premium  paid  on  the 
bonds,  other  things  equal,  the  lower  the  net  inter- 
est yield;  and  the  lower  the  premium,  the  higher 
the  yield.  The  result  was  a  tendency  for  the' 
banks  to  increase  their  bank-note  circulation  when 
the  price  of  bonds  declined  and  to  decrease  it 
when  the  price  rose.  In  other  words,|the  expan- 
sion and  contraction  of  the  bank-note  circulation 
was  not,  as  it  should  have  been,  in  response  to 
variations  in  trade  demands,  but  in  response  to 
variations  in  the  price  of  the  government  debt. 
This  often  gave  an  inverse  elasticity,  since  the 
price  of  government  bonds  often  declined  at 
times  when  business  was  slack  and  the  currency 
was  already  redundant,  and  often  rose  at  times 
when  business  was  active  and  an  increase  in  the 
bank-note  circulation  was  desirable.     In  other 


FEDERAL  RESERVE  SYSTEM  13 

words,  the  bank-note  circulation  frequently  de- 
clined at  just  the  time  when  business  needs  de- 
manded an  increase,  and  increased  when  the  busi- 
ness situation  called  for  a  decline.  The  character 
of  these  fluctuations  will  be  seen  from  the  fol- 
lowing chart.^  ^ "^^  '^ 

From  season  to  season  the  bank-note  circula- 
tion was  very  irresponsive  to  varying  trade  de- 
mands. There  was  considerable  delay  and  red- 
tape  invnivpri   in   nhtflining  the  Tl^of^^^^^  bouds,    ^M^^^^* 

depositing  them  at  Washington  and  obtaining 
bank  notes  for  circulation;  and  these  obstacles, 
together  with  the  expenses  involved  and  the  re-  . 
strictions  upon  the  subsequent  retirement  of  notes  ^ 
once  issued,^  made  it  impracticable  for  banks  to 
meet  temporary  needs  for  additional  currency, 
like  those  of  the  crop-moving  period,  by  issuing 
additional  notes.  About  all  that  can  be  said_fa-' 
vorable  to  the  seasonal  elasticityof  the  national 
bank  notes  is  that  banks  intending  to  increase 
permanently  their  bank-note  circulation  tended 
to  make  the  increase  in  the  fall  when  the  demands 
for  currency  were  normally  largest.  In  the  mat- 
ter of  seasonal  elasticity  our  national  bank-note 

2  Figures  plotted  on  the  chart  do  not  include  the  issues  of  Aid- 
rich- Vreeland  emergency  notes.     See  note  4,  page   15. 

8  Down  to  May  30,  1908,  the  law  limited  the  amount  of  national 
bank  notes  that  could  be  withdrawn  in  any  one  calendar  month 
to  $3,000,000,    On  that  date  the  law  raised  the  limit  to  $9,000,000. 


SI  JM  <-« 


FEDERAL  RESERVE  SYSTEM  15 

circulation  showed  up  very  unfavorably  in  com- 
parison with  the  bank-note  circulation  of  Canada, 
which,  under  the  system  of  branch  banks  and  an 
asset  bank-note  currency,  was  highly  responsive 
to  seasonal  variations  in  currency  needs.  The 
contrast  will  be  made  clear  by  the  following  chart 
{Chart  II)  showing  the  variations  in  the  monthly 
bank-note  circulation  of  the  two  countries  prior 
to  November,  1914,  the  date  when  the  federal 
reserve  banks  were  opened.^ 

In  times  of  crisis  national  bank  notes  could  not 
be  depended  upon  to  provide  additional  currency. 
Government  bonds  were  usually  difficult  to  se- 
cure on  favorable  terms  at  such  times,  and  the 
machinery  for  taking  out  new  circulation  worked 
too  slowly.  Some  progress  was  made  in  the  di- 
rection of  improving  the  old  system  in  this  regard 
during  the  latter  years  of  the  old  regime;  and, 
under  the  spur  of  strong  appeals  to  the  banks  and 
active  assistance  from  the  Treasury  Department, 
there  was  some  helpful  increase  in  the  national 
bank-note  circulation  at  the  times  of  the  panic  of 
1907  and  the  crisis  of  1914.    At  best,  however, 

*The  figures  plotted  on  the  chart  do  not  include  the  circula- 
tion of  the  so-called  Aldrich-Vreeland  emergency  notes,  which  were 
first  issued  in  August,  19r4,  reached  their  maximum  in  October, 
and  were  all  retired  by  the  following  July.  Legal  authority  to 
issue  such  emergency  notes  expired  by  limitation  June  30,  1915. 
Federal  Reserve  Act,  section  27. 


TF-I 


s      i 


FEDERAL  RESERVE  SYSTEM  17 

the  bond-secured  notes  were  a  weak  reed  to  rest 
upon  in  time  of  crisis. 

Inelasticity  of  Deposit  Credit 

Our  loan  and  deposit  credit  was  likewise  defi- 
cient in  the  quality  ofs  elasticity.  Rigid  legal 
minima  for  bank  reserves  set  up  an  obstacle  to 
loan  and  deposit  expansion  at  times  of  increasing 
business  activity.  Banks  which  were  "loaded  up" 
and  could  not  make  further  advances  to  regular 
customers  of  good  standing  were  prevented  from 
loaning  their  credit  to  these  customers  by  ac- 
cepting bills,  which  the  customers  might  draw 
upon  them,  as  is  the  common  custom  in  Europe, 
because  our  courts  had  ruled  that  bank  accept- 
ances were  illegal.  The  rediscount  business 
among  oui^  banks  was  almost  negligible,  and  most 
of  that  which  existed  was  done  on  the  quiet  and 
under  cover.  Rediscounting  was  frowned  upon 
by  bankers  and  business  men,  and  there  was  no 
central  institution  like  the  central  banks  of  Eu- 
rope, whose  business  it  was  to  rediscount  the  pa- 
per of  other  banks  in  times  of  need.  Our  Ameri- 
can commercial  paper  was  largely  local  paper  and 
we  had  comparatively  little  that  could  be  sold  in 
distant  markets,  either  at  home  or  abroad.  In 
other  words,  rigidity  gather  than  elasticity  was  a 
characteristic  feature  of  our  Amencan  deposit 
credit. 


18  FEDERAL  RESERVE  SYSTEM 

Evil  Results  of  Credit  Inelasticity 

To  this  defect  of  credit  elasticity  coupled  with 
that  of  decentralization  were  to  be  attributed 
largely  the  frequent  and  wide  fluctuations  in  the 
interest  rates  on  call  and  short-time  loans,  for 
which  American  money  markets  were  notorious, 
the  alternation  of  periods  of  excessive  specula- 
tion stimulated  by  redundancy  of  currency  and 
credit  with  periods  of  stringency  and  liquida- 
tion brought  on  by  scarcity.  For  this  rigidity 
of  our  credit  system  the  business  men  and  the 
farmers  paid  the  price  of  higher  interest  rates;, 
the  farmer  suffered  through  the  necessity  of 
selling  his  staple  crops  largely  in  the  fall  when 
a  tight  money  market  was  depressing  prices,  and 
of  buying  his  supplies  largely  in  the  early  spring 
when  easy  money  conditions  tended  to  make 
prices  abnormally  high;  the  banker  was  com- 
pelled to  keep  large  reserves  and  to  tie  up  an  ex- 
cessive amount  of  his  commercial  deposits  in  capi- 
tal investments,  such  as  the  purchase  of  bonds 
and  the  making  of  call  loans  on  stock  exchange 
collateral;  while  upon  all  classes  in  the  commun- 
ity an  uncertain  and  unstable  money  market, 
which  was  wont  to  collapse  frequently  in  panics, 
imposed  the  burden  of  great  financial  anxiety^ 


CHAPTER  IV 

Defective  Exchange  and  Transfer  System 

A  third  group  of  defects  in  our  old  banking 
system  consisted  in  certain  cumbersome  features 
— unnecessary  wheels  and  bolts  as  it  were— in 
our  doniiestic  and  foreign  exchange  mechanism. 
These  features  greatly  interfered  with  the  effi- 
cient operation  of  the  machine  and  at  the  same 
time  added  to  the  expense.  This  subject  is  a 
large  and  complicated  one  and  can  only  be 
touched  upon  here.  It  may  be  divided  into  two 
parts,  that  relating  to  domestic  exchange,  and 
that  relating  to  foreign  exchange.- 

Domestic  Exchange 

Of  the  hundreds  of  billions  of  dollars  in  checks 
drawn  every  year,  a  very  large  proportion  are 
for  local  payments,  and,  being  settled  promptly 
through  local  clearing  houses  or  directly  between 
the  banks  concerned,  offer  no  difficulties.  Our 
American  clearing  house  machinery  is  a  marvel 
of  perfection  for  the  settlement  of  local  checks. 
In  addition  to  the  checks  drawn  for  purely  local 

19 


20  THE  A  B  C  OF  THE 

payments,  however,  checks  whose  span  of  life  is 
but  one  day  and  which  are  born,  live  and  die 
within  the  narrow  limits  of  one  town  or  city,  there 
are  millions  of  checks  drawn  daily  for  out-of- 
town  payments,  checks  whose  span  of  life  often 
covers  many  days  and  which  in  the  range  and 
speed  of  their  movements  excel  the  proverbial 
American  tourist  party  in  Europe.  The  supply 
of  these  checks  that  is  continually  in  transit,  re- 
cently estimated  to  amount  at  any  one  time  to 
about  $300  millions,  is  what  is  known  among 
bankers  as  the  "float."  The  problem  of  efficient- 
ly and  cheaply  handling  this  float  and  of  equit- 
ably apportioning  the  expense  was  for  years  a 
perplexing  one.  Some  clearing  houses,  as  for 
example  that  of  New  York,  imposed  certain  defi- 
nite charges  for  the  collection  of  checks  on  points 
beyond  a  certain  radius  from  New  York  City. 
Other  clearing  houses  imposed  no  charges.  The 
Boston  clearing  house  developed  a  system  for  the 
parring  of  checks  throughout  New  England, 
thereby  eliminating  all  collection  charges  on  items 
drawn  on  banks  entering  the  system.  Similar 
devices  were  adopted  in  a  number  of  other  sec- 
tions of  the  country,  notably  in  the  middle  west. 
Some  cities,  like  Albany  for  example,  became 
known  as  free  cities  and  others  were  notorious 
for  their  high  collection  charges.     Many  banks 


m 


FEDERAL  RESERVE  SYSTEM  21 

imposed  exchange  charges — some  high  and  some 
low — for  the  collection  of  out-of-town  checks  re- 
ceived over  their  counters,  and  some  made  a 
charge  for  the  collection  of  checks  drawn  upon 
themselves  when  presented  from  out-of-town 
sources.  These  practices  led  among  other  evils  i 
to  the  practice  of  routing  checks,  which  means/ 
that  checks  in  the  process  of  collection  would  of- 
ten be  sent  by  roundabout  and  devious  routes  in 
order  to  avoid  or  reduce  collection  charges.  In 
this  way  the  length  of  time  in  which  checks  were 
in  transit  was  increased  and  the  economic  cost  to 
the  community  for  the  collection  of  checks  was 
made  heavier. 

One  serious  phase  of  the  practice  of  routing  » 
checks  was  the  manner  in  which  it  padded  legal  [ 
reserves.     Competition  among  farge-city  banks  \ 
for  the  accounts  of  country  banks  led  the  city 
banks  to  give  an  immediate  credit  to  the  country 
banks  for  out-of-town  checks,  checks  which  some- 
times took  the  city  bank  a  week  or  more  to  col- 
lect.   The  country  bank  counted  as  legal  reserve 
out-of-town  checks  sent  to  the  reserve  city  bank 
for  collection  as  soon  as  they  were  mailed.    The 
reserve  city  bank  in  turn  would  send  some  of 
these  same  checks  to  the  central  reserve  city  bank 
and  count  them  as  reserve  money  as  soon  as  they 
were  put  in  the  maiL...Jn  this  way  one  check  in 


22  THE  A  B  C  OF  THE 

transit  frequently  counted  as  legal  reserve  for 
both  a  country  bank  and  a  reserve  city  bank.  Oc- 
casionally such  a  check,  after  performing  a  yeo- 
man service  in  being  counted  as  legal  reserve 
money  by  two  banks  for  several  days,  would  be 
returned  as  worthless  marked  "no  funds," 

Another  defect  of  the  domestic  exchange  sys- 
tem was  the  expense  and  trouble,  for  which  it 
was  largely  responsible,  of  requiring  heavy  ship- 
ments of  currency  back  and  forth  over  the  coun- 
try. 'As  previously  noted,  American  money 
markets  are  subject  to  pronounced  seasonal 
swings.  At  one  season  of  the  year  the  relative 
demand  for  bank  funds  is  heaviest  in  the  cotton 
belt  of  the  south ;  at  another  time  it  is  heaviest  p 
the  great  cereal  producing  sections  of  the  west 
and  middle  west;  and  at  another  season  it  is 
heaviest  in  the  leading  financial  centers  of  the 
east.  This  heaviest  demand  often  shifts  from  one 
section  to  another  within  a  very  brief  period  of 
time.  Under  our  old  banking  system  these  shifts 
carried  with  them  large  shipments  of  currency 
— shipments  amounting  in  the  course  of  a  year 
to  hundreds  of  milhons  of  dollars — and  frequent- 
ly a  shipment  would  hardly  be  received  and  un- 
packed before  a  shift  in  the  monetary  demand 
would  require  it  to  be  sent  to  another  section  or 
perhaps  to  be  returned  to  the  place  whence  it 


FEDERAL  RESERVE  SYSTEM  23 

came.  All  this  involved  expense,  including  pack- 
ing, shipping,  abrasion,  insurance  and  interest 
items. 

A  second  phase  of  the  exchange  difficulties  un- 
der the  old  banking  system  was  that  relating  to 
the  foreign  exchanges. 

Foreign  Exchange  Difficulties 

Our  foreign  trade  was  financed  largely  through 
London,  and  those  parts  of  the  trade  which  were 
witli  the  Orient  and  with  South  America  were 
financed  almost  entirely  through  London.  Lon- 
don is  the  world's  financial  center  and  it  is  but 
natural  that  we  should  utilize  to  a  substantial  ex- 
tent her  unrivalled  facilities  for  financing  oversea 
trade.  The  trouble  was  not  that  we  utilized  them, 
but  that  we  utilized  them  too  much  and  were 
unduly  dependent  upon  them.  This  involved 
several  difficulties,  only  two  of  which  need  be 
mentioned  here.  In  the  first  place,  payments 
through  London  gave  rise  to  an  additional  for- 
eign exchange  operation,  which  normally  added 
to  both  the  expense  and  the  risk  of  financing  a 
shipment  of  goods.  In  the  second  place,  the  fact 
that  invoices,  bills  of  lading  and  other  documents 
passed  through  the  hands  of  foreign  banks  and 
of  South  American  or  oriental  branches  of  for- 
eign banks  gave  to  our  foreign  competitors  "in- 


24 


FEDERAL  RESERVE  SYSTEM 


side"  information  concerning  our  foreign  busi- 
ness^riformation  that  was  often  used  to  their 
advantage  in  competition  with  our  own  citizens. 
We  now  come  to  the  fourth  and  last  of  the  de- 
fects in  our  old  banking  system,  which  were  out- 
lined at  the  beginning  of  this  book.  That  is  a 
defect  which  is  concerned  with  the  relations  of 
our  banking  system  to  the  federal  treasury. 


CHAPTER  V 

Defective  Banking  Machinery  foe  Federal 
Government 

The  general  funds  of  the  treasury  were  kept  in 
part  in  the  country's  nine  sub-treasuries,  and  in 
part  in  national  banks,  which  qualified  as  deposi- 
tories of  government  funds.  There  were  1,584 
such  national  bank  depositories  at  the  close  of  the 
fiscal  year  1914.  The. apportionment  of  the  funds 
between  the  sub-treasuries  and  the  banks  on  the 
one  hand,  and  among  the  depository  banks  on  the 
other  hand,  was  entrusted  to  the  Secretary  of  the 
Treasury.  The  treasury  funds  to  be  thus  appor- 
tioned varied  widely  from  year  to  year  and  from 
season  to  season. 

In  a  number  of  respects  this  system  worked 
badly.     Briefly  summarized,   the   defects  were 
as  follows:     (1)  It  led  to  the  continual  hoard-""' 
ing  in  treasury  vaults  of  large  sums  of  money     |'^ 
involving    substantial    administrative    expenses 
and  a  heavy  loss  of  interest.     (2)   At  certain 
seasons  of  the  year  the  Government's  receip 
greatly  exceed  its  disbursements,  as  for  exampl 

25 


uses    j  I 
tain    I  \ 
liptaGL) 
nple   1/ 


26  THE  A  B  C  OF  THE 

at  the  times  when  tax  payments  are  heaviest; 
while  at  other  seasons,  as  for  example  when 
pension  money  or  interest  on  the  public  debt 
is  being  paid,  the  disbursements  exceed  the 
receipts.  In  the  former  case  the  money  market 
was  disturbed  by  the  Government's  suddenly 
withdi^awing  large  sums  from  circulation  and 
thereby  contracting  the  currency.  In  the  latter 
case  it  was  disturbed  by  the  sudden  pumping  in- 
to circulation  of  large  sums  of  money.  These 
operations,  when  on  any  substantial  scale,  tended 
to  affect  the  interest  rates  on  call  loans  and  the 
prices  of  speculative  securities.  The  task  im-' 
posed  upon  the  Secretary  of  the  Treasury,  there- 
fore, of  apportioning  these  large  government  bal- 
ances among  the  banks  and  the  sub-treasuries  was 
a  difficult  one  and  one  which  placed  too  great 
power  and  responsibility  over  the  money  market 
in  the  hands  of  a  government  official.  It  also 
led  to  criticism  and  jealousy  among  depository 
banks.  (3)  The  system  caused  depository 
banks  to  rely  unduly  upon  the  Secretary  of  the 
Treasury  for  aid  in  the  form  of  increased  govern- 
ment deposits  in  times  of  financial  pressure,  in- 
stead of  depending  upon  themselves  and  keeping 
"their  houses  in  order"  so  as  to  be  ready  for 
emergencies.  "The  grandfatherly  attitude  of 
the  Secretary  of  the  Treasury  toward  the  banks" 


M 


FEDERAL  RESERVE  SYSTEM  27 

in  the  matter  of  government  deposits  was  an  ex- 
pression frequently  heard. 

The  four  chief  defects  of  our  American  bank- 
ing system  as  it  existed  prior  to  the  enactment  of 
the  federal  reserve  law  have  now  been  briefly  de- 
scribed. They  were  decentralization,  inelasticity 
of  credit,  cumbersome  transfer  system,  and  de- 
fective governijient  depository  system..  To 
remedy  these  defects  the  federal  reserve  system 
was  created  by  the  law  of  December  23,  1913; 
and  federal  reserve  banks  opened  their  doors  for 
business  November  16,  1914.  Since  that  date 
the  system  has  developed  rapidly  under  the  man- 
agement of  administrative  boards  and  under  the 
influence  of  a  number  of  important  amendments 
to  the  organic  law.  It  is  not  our  task  here  to 
trace  this  interesting  development,  but  rather  to 
answer  briefly  the  question:  How  is  the  federal 
reserve  system  as  now  developed  remedying  the 
defects  of  the  old  banking  system?  Let  us  con- 
sider the  remedy  in  its  relation  to  the  four  gen- 
eral defects  in  the  order  in  which  they  have  been 
discussed. 


/ 


CHAPTER  VI 


How  THE  Federal  Reserve  System  is  Remedy- 
ing THE  Old  Evil  of  the  Decentral- 
ization OF  American  Banking 

The  federal  reserve  act  does  not  destroy  our 
American  system  of  small  independent  banks 
with  its  prestige  of  over  a  half  century  of  growth 
and  usefulness,  and  with  its  great  merit  of  local 
adaptabihty  to  the  needs  of  a  country  of  magnifi- 
cent distances  and  of  widely  varying  economic 
activities.  The  federal  reserve  law  continues 
these  thousands  of  independent  banks  with  all 
their  essential  functions,  but  federates  them  into 
a  unified  system  which  is  democratic  in  its  organi- 
zation and  nationwide  in  its  field  of  operation — 
a  system  dedicated  to  pubhc  service. 

Federal  Reserve  Districts 

There  are  twelve  federal  reserve  banks,  each 
of  which  operates  in  one  of  the  federal  reserve 
districts  into  which  the  country  is  divided.  In 
determining  the  boundaries  of  these  districts  the 
authorities  were  required  to  have  "regard  to  the 


FEDERAL  RESERVE  SYSTEM  29 

convenience  and  customary  course  of  business," 
to  make  each  district  large  enough  to  provide  the 
minimum  capital  of  $4,000,000  required  by  law, 
and  to  make  none  so  large  as  to  dominate  the 
others  thereby  endangering  the  federal  principle 
which  the  law  sought  to  establish,  A  map  show- 
ing the  boundaries  of  the  twelve  federal  reserve 
districts  and  the  location  in  each  district  of  the 
federal  reserve  city,  namely,  the  city  in  which  the 
main  office  of  the  federal  reserve  bank  is  located, 
is  given  below.  ^ 

The  fact  that  the  number  of  banks  and  the 
amount  of  banking  capital  in  different  sections 
*^of  the  country  vary  so  widely  explains  the  great 
differences  in  the  geographic  sizes  of  the  federal 
reserve  districts. 

Plan  of  Organization 

All  national  banks  are  required  to  be  members 
of  the  system,  and  state  banks  and  trust  com- 
panies (which  conform  to  certain  standards  as 
to  size  and  character  of  business)  are  encouraged 
to  join.  Comparatively  few  state  institutions 
joined  during  the  first  two  years  of  the  system, 
but  the  liberal  policies  of  the  federal  reserve 

1  The  map  is  a  reproduction  of  the  one  published  in  the  Third 
Annual  Report  of  the  Federal  Reserve  Board  (1916),  opposite 
page  133. 


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FEDERAL  RESERVE  SYSTEM  31 

authorities,  together  with  later  amendments  to 
the  law  and  a  growing  feeling  that  it  is  the  patri- 
otic duty  of  state  institutions  to  join  the  system 
in  these  times  of  national  emergency,  these  fac- 
tors have  all  made  the  state  institutions  more 
favorably  disposed  toward  the  system  and  they 
have  lately  been  joining  in  ever  increasing  num- 
bers,      i-'y^-'j^r- 

Member  banks  are  required  to  subscribe  to  the 
capital  stoct  of  the  federal  reserve  bank  in  their 
district  to  an  amount  equal  to  six  per  cent  of  the 
member  bank's  capital  and  surplus:  Only  one- 
half  of  this  subscription  has  so'  far  been  called, 
giving  the  federal  reserve  banfe  a  paid-in  capital 
of  $73,401,000  on  Marchl,  1918,^  but  the  other 
half  may  be  called  at  any  time  by  the  federal 
reserve  authorities.  " 

There  are  two  noteworthy  features  of  a  federal 
reserve  bank's  plan  of  organization.     They  are,  • 
first,  its  democracy^  and  second,  its  recognition  of 
the  quasi-public  nature  of  the  banking  business  ^  »  y 
through  its  grant  to  the  public  of  participation  y  /  / 
in  the  bank's  management*  »  /' 

The  control  of  a  federal  reserve  bank  is  as 
democratic  as  our  American  democracy  itself. 
"One  bank,  one  vote"  is  the  rule,  and  the  vote  of 

2  The  surplus  was  $1,134,000  on  that  date  which  had  been  ac- 
cumulated out  of  profits. 


38  THE  A  B  C  OF  THE  ^ 

the  First  National  Bank  of  Jacksonville,  with 
its  $25,000  capital  counts  as  much  as  that  of  the 
National  City  Bank  of  New  York  with  a  capital 
and  surplus  2,880  times  as  large.  Furthermore, 
in  order  to  prevent  the  large  banks  from  domi- 
nating the  small  ones  by  reason  of  their  greater 
prestige  and  to  assure  the  small  banks  of  repre- 

'"<'"'   sentation  on  the  board  of  directors,  there  is  a 

device  by  which  all  the  member  banks  are  divided 

according   to   their   capital   into   three    classes, 

which,   reminiscent  of  the   three  bears   in  the 

^^Goldylock  story,  may  be  called  big  banks,  little 

Vt^^  banks,  and  middle-sized  banks.  All  the  member 
banks  in  a  federal  reserve  district  are  grouped 
into  these  three  classes,  the  largest  bank  in  the 
group  of  little  banks  being  smaller  than  the 
smallest  one  in  the  group  of  middle-sized  banks, 
and  the  largest  one  in  the  group  of  middle- 
sized  banks  being  smaller  than  the  smallest  one 
in  the  group  of  big  banks.  On  the  basis  of 
the  one  bank  one  vote  principle,  each  grqup 
elects^two  directors,  one  of  whom,  called  a  Class 
A  director,  is  a  banker  and  represents  the 
stock-holding  banks,  while  the  other,  called  a 
Class  B  director,  is  a  business  man  or  farmer  and 
represents  the  business  community.  To  these 
six  directors  so  elected  there  are  added  three 
others  known  as  Class  C  directors,  who  are  ap- 


FEDERAL  RESERVE  SYSTEM  33 

pointed  by  the  central  federal  reserve  authorities 
at  Washington  to  represent  the  interests  of  the 
federal  government  and  of  the  general  public* 
One  of  these  Class  C  directors,  who  is  required  to 
be  a  person  of  "tested  banking  experience,"  is 
designated  by  the  central  authorities  as  Chair- 
man of  the  Board,  and  is  known  as  federal  re-     ^ 
j  serve  agent.    The  board  thus  consists  of  nine  di-    ^  ^j 
rectors,  who  hold  office  for  three  years  (the  temi   ^^r  ^^  4 
of  office  of  one  director  of  each  class  terminating  W 

each  year),  and  who  are  broadly  representative 
of  different  interests  among  the  American  public. 
Crowning  the  arch  of  which  the  twelve  federal 
reserve  banks  constitute  the  structural  stones  and 
f  forming  its  keystone,  is  the  central  board  at 
'  Washington,  known  as  the  federal  reserve  board. 
This  board  consists  of  seven  members^  including 
the  Secretary  of  the  Treasury  and  the  Comptrol- 
ler of  the  Currency,  who  are  ex-officio  members, 
and  %^Q  members  appointed  by  the  President  of 
the  United  States  with  the  advice  and  consent  of 
the  Senate,  who  hold  office  for  a  period  of  ten 
years.  At  least  two  of  these  five  members  the 
law  says  must  be  "experienced  in  banking  or  fi- 
nance." The  Secretary  of  the  Treasury  is  ex- 
officio  chairman  of  the  federal  reserve  board.  The 
board  is  assisted  by  a  federal  advisory  council, 
consisting  of  twelve  members  appointed  respec- 


84  THE  A  B  C  OF  THE 

tively  by  the  boards  of  directors  of  the  twelve 

federal   reserve   banks.     The   advisory   council 

yf  meets  with  the  federal  reserve  board  at  least  four 

\  times  each  year  and  oftener  if  called  by  the 

'  board.  ^      J.,  .f'    '  . 

/  I       The  appointment  by  the  federal  reserve  board 

_      /  I  of  three  of  the  nine  directors  (including  the  chair- 

'   man)  of  each  of  the  federal  reserve  banks  and 

the  appointment  by  each  federal  reserve  bank  of 

a  member  of  the  federal  advisory  council  federate 

V    \  \\  together  the  twelve  federal  reserve  banks  under 

^^    «    ^  the  federal  reserve  board  and  give  a  common 

knowledge  and  a  unity  of  purpose^    Conferences 

from  time  to  time  of  the  governors  of  the  twelve 

federal  reserve  banks  and  of  the  federal  reserve 

agents  of  the  banks,  and  occasional  conferences 

of  the  governors  and  the  federal  reserve  agents 

with  the  federal  reserve  board  have  added  much 

to  the  smooth  and  unified  working  of  the  system. 

In  matters  of  general  policy  the  federal  reserve 

board  is  given  large  powers  and  is  the  directing 

head  of  the  system^^ 

3 The  board's  control  is  strengthened  by  its  statutory  powers: 

(1)  "To  examine  at  its  discretion  the  accounts,  books  and  affairs 
of  each  federal  reserve  bank  and  of  each  member  bank  and  to  re- 
quire such  statements  and  reports  as  it  may  deem  necessary.  .  ." 

(2)  'To  suspend  or  remove  any  officer  or  director  of  any  federal  re- 
serve bank.  .  ."  (3)  "To  suspend,  for  the  violation  of  any  of  the 
provisions  of  this  act,  the  operations  of  any  federal  reserve  bank, 
to  take  possession  thereof,  administer  the  same  during  the  period 


FEDERAL  RESERVE  SYSTEM  35 

Here  then  is  the  centralizing  machinery  which 
is  bringing  order  into  our  banking  system,  and 
is  making  possible  the  development  of  broad 
financial  policies  which  can  be  carried  out  with 
promptness  and  continuity. 

In  considering  the  manner  in  which  the  old  evil 
of  decentralization  is  being  remedied  by  the  fed- 
eral reserve  system,  we  may  now  pass  from  the 
administrative  machinery  of  centralization  to  the 
methods  by  which  the  old  evils  of  scattered  and 
imniobile  reserves  are  being  eliminated. 

District  Centralization  of  Bank  Reserves 

The  federal  reserve  act  as  originally  passed 
provided  for  the  gradual  withdrawal  of  legal 
reserve  money  from  deposit  in  the  banks  of  re- 
serve and  central  reserve  cities.  All  such  de- 
posited legal  reserves  were  to  be  withdrawn  by 
the  end  of  a  three-year  period  beginning  with  the 
date  of  the  inauguration  of  the  federal  reserve 
system.  Accordingly,  after  November  16,  1917, 
all  legal  reserve  money  of  member  banks,  the 
law  required  to  be  held  "in  the  vaults  of  the  mem- 
ber bankiS  or  in  the  federal  reserve  bank,  or  in 
both,  at  the  option  of  the  member  bank"  (section 

of  suspension,  and,  when  deemed  advisable,  to  liquidate  or  re- 
organize such  bank."  (4)  "To  exercise  general  supervision  over 
said  federal  reserve  banks."    Federal  Reserve  Act,  Section  11. 


36  THE  A  B  C  OF  THE 

19  of  Act) .  In  conformity  with  this  requirement 
the  percentage  of  the  legal  reserves  of  member 
banks  kept  on  deposit  in  the  banks  of  reserve  and 
central  reserve  cities  declined  very  much  by  the 
summer  of  1917.  On  June  21,  1917,  an  amend- 
ment was  passed  to  the  federal  reserve  act  requir- 
ing every  bank,  banking  association  or  trust  com- 
pany belonging  to  the  federal  reserve  system  to 
maintain  its  entire  legal  reserve  in  the  form  of  a 
deposit  at  the  federal  reserve  bank  of  its  district* 
Thus  by  about  five  months  the  time  was  antici- 
pated when  legal  reserve  money  of  member  banks 
should  cease  to  be  kept  on  deposit  in  banks  other 
/than  federal  reserve  banks.  The  time  therefore 
/  arrived  in  the  summer  of  1917  when  commercial 
/  banks  belonging  to  the  federal  reserve  system 
'  ceased  tying  up  their  legal  reserve  money  by  de- 
positing it  in  the  banks  of  our  money  market 
centers  there  to  be  loaned  out  at  call  to  specu- 
lators on  the  stock  and  produce  exchanges.  This 
divorcing  of  the  legal  reserves  of  nearly  8,000 
commercial  banks  from  the  speculative  and  capi- 
tal loans  of  the  stock  market — ^mainly  that  of 
Wall  Street — is  one  of  the  big  achievements  of 
the  federal  reserve  system-.  The  federal  re- 
serve law,  as  amended,  recognizes  only  one  form 
of  legal  reserve,  and  that  is  a  member  bank's  de- 
posit in  its  federal  reserve  bank.    Member  banks 


FEDERAL  RESERVE  SYSTEM  37 

may  keep  as  much  or  as  little  cash  on  hand  for 
till  money  as  they  wish  to.  They  may  keep  bal- 
ances in  other  banks  if  it  suits  their  convenience 
to  do  so — all  that  is  their  own  affair  for  which 
their  responsibility  is  to  their  stock  holders  and 
their  customers — but  their  legal  reserve,  the  re- 
serve which  the  Government  looks  upon  as  the 
minimum  below  which  the  public  interest  de- 
mands that  banks  should  not  go,  that  reserve 
must  all  be  kept  on  deposit  in  federal  reserve 
banks,  the  nation's  reservoirs  of  reserve  money. 
For  reasons  that  will  soon  be  made  clear  the 
concentration  of  the  country's  reserve  money  in 
a  few  large  reservoirs  makes  possible  a  much 
more  efficient  use  of  each  dollar  of  reserve  money 
than  under  the  old  system  of  scattered  reserves,  j 
and,  as  a  result,  the  legal  reserve  requirements 
have  been  greatly  reduced.  The  percentages 
reserves  at  present  required  against  demand  de- 
posits and  time  deposits  are  as  follows: 


Demand  Deposits, 

Time  Deposits, 

i.e.,  Deposits  Pay- 

i.e., Deposits  Pay- 

able Within 

able  After  30 

Banks                                            30  Days 

Days  Notice 

Central  reserve  city  banks,                  13 

3 

Reserve  city  banks,                                10 

3 

CJountry  banks,                                          7 

3 

On  March  1,  1918,  the  twelve  federal  reserve 
banks  held  deposited  reserves  of  other  banks  to 


\ 


38  THE  A  B  C  OF  THE 

the  amount  of  $1,388  millions.  Reserve  money 
collected  in  a  few  large  reservoirs  is  quickly 
available  in  large  quantities  either  for  export  or 
for  domestic  use,  and  the  fact  that  it  is  readily 
available  in  large  quantities  inspires  public  con- 
fidence and  lessens  the  danger  of  financial  panic. 
When  the  public  knows  that  gold  in  abundance 
is  available  on  demand  it  does  not  want  it, 
except  to  meet  the  normal  demands  of  interna- 
tional trade.  The  federal  reserve  banks,  of 
course,  do  not  keep  on  hand  all  the  reserve  money 
deposited  by  member  banks.  Like  other  banks, 
they  invest  it.  The  law,  however,  requires  them 
to  keep  a  reserve  of  thirty ^five  per  cent  against 
deposits,^  and  it  is  their  established  policy  to 
maintain  reserves  much  larger  than  this  normal 
legal  minimum.  ^J 

Mobilization  of  Reserves  ^ 

A  corollary  to  the  district  centralization  of  re- 
serves is  their  mobilization.  Reserve  money  must 
not  only  be  piped  into  a  few  large  reservoirs,  but 
these  large  reservoirs  must  be  piped  together,  and 
there  must  be  a  pumping  engine  of  sufficient 
power  to  force  the  reserves  promptly  and  in  large 
quantities  to  any  place  desired.  The  federal  re- 
serve system  creates  just  this  machinery.    It  pro- 

4  See  pages  59-60. 


FEDERAL  RESERVE  SYSTEM  39 

vides  numerous  devices  by  which  reserve  money 
can  be  quickly  moved  from  places  of  redundancy 
io  places  of  scarcity.  A  few  of  the  more  import- 
ant of  these  devices  will  be  briefly  described  here, 
while  others  will  be  discussed  later  in  connection 
with  the  general  topics  of  currency  and  credit 
elasticity  and  the  transfer  system.  Let  us  con- 
sider first  the  inter-district  mobility  of  reserve 
money,  namely  the  movability  of  reserves  from 
one  federal  reserve  district  to  another;  and  sec- 
ond, the  intra-district  mobihty  of  reserves,  or  the 
movability  of  reserves  within  the  boundaries  of; 
one  district. 

Inter-District  Mobility 

Broadly  speaking  there  are  three  ways  in  which 
the  federal  reserve  law  has  increased  the  inter- 
district  mobility  of  reserve  money,  'fhey  are: 
(1)  Rediscounting  by  one  federal  reserve  bank 
for  another.  (2)  Open  market  operations  of  fed- 
eral reserve  banks.  (3)  Creation  of  a  broader 
discount  market  for  commercial  paper. 

Rediscounting  by  one  Federal  Reserve  Bank  for 
Another 

Under  the  old  banking  system,  as  we  have  seen, 
in  time  of  emergency,  each  bank  held  tight  its 
own  reserves,  or,  to  change  the  figure,  "sat  firmly 


y 


40  THE  A  B  C  OF  THE 

on  the  lid."    In  the  controversy  for  banking  re- 
form, which  cuhninated  in  the  federal  reserve  act, 
the  advocates  of  a  single  central  bank  contended 
that  a  system  of  eight  to  twelve  banks  hke  that 
proposed  in  the  federal  reserve  bill  would  per- 
petuate the  old  evil  by  leading  to  the  same  sort 
of  scramble  for  reserves,  in  time  of  emergency, 
among  the  different  federal  reserve  banks,  that 
had  formerly  existed  among  the  individual  banks 
of  the  country.    Specifically  to  meet  this  danger 
a  provision  was  inserted  in  the  act  ( Section  II )  _ 
empowering  the  federal  reserve  board  "to  permit, 
or,  on  the  affirmative  note  of  at  least  five  mem- 
bers of  the  reserve  board  to  require  federal  re- 
serve banks  to  rediscoun^Jhe  discounted  paper  of 
other  federal  reserve  banks  at  rates  of  interest  to 
be  fixed  by  the  federal  reserve  board."     This      I 
means  that  in  case  there  is  an  exceptionally  heavy      | 
demand  for  reserve  money  in  any  section  of  the      \ 
coimtry — a  demand  heavier  than  the  banks  of     > 
that  section  can  reasonably  meet — the  reserve'^    1 
banks  in  other  sections  where  money  is  more 
plentiful  will  come  to  the  rescue,  either  voluntar-      \ 
ily  or  under  compulsion  of  the  federal  reserve      \ 
board,  and  will  rediscount  the  paper  of  the  reserve      I 
bank  in  the  section  under  fijiancial  stress.    This 
process,  of  course,  will  cause  a  flow  of  cash  from 
the  reserves  of  the  former  banks  to  the  reserve  of 


FEDERAL  RESERVE  SYSTEM  41 

the  latter,  thereby  easing  the  money  market  in  the 
threatened  section.  The  twelve  federal  reserve 
banks  have  so  far  worked  so  harmoniously, 
thanks  largely  to  the  frequent  conferences  of  the 
governors  and  the  federal  reserve  agents  both 
among  themselves  and  with  the  federal  reserve 
board,  that  it  seems  improbable  that  compulsion 
by  the  board  will  often  be  necessary  to  require  the 
more  favorably  situated  banks  to  come  to  the 
rescue  of  those  less  favorably  situated,  in  time  of 
danger.  So  far  the  board  has  exercised  compul- 
sion in  only  two  instances.  The  reserves  of  the 
twelve  reserve  banks  are  so  closely  piped  togetiier, 
particularly  since  the  formation  of  the  gold  set- 
tlement fund  (to  be  described  later,  pages  76-77) , 
that  they  may  reasonably  be  considered  to  be 
closely  connected  tanks  of  a  tingle  large  reser- 
voir. 


Ml. 


Open-Marke^npShifions 

While  the  federal  reserves' banks  are  essentially 
bankers'  banks,  since  their  stock  is  owned  ex- 
clusively by  member  banks  and  since  their  only 
regular  domestic  customers  are  banks  and  the 
federal  government,  it  is  none  the  less  true  that 
Congress  found  it  necessary  to  confer  upon  these 
banks  certain  limited  rights  of  dealing  with  the 
outside  pubhc.    The  possession  of  such  rights  by 


42  THE  ABC  OF  THE 

the  federal  reserve  banks  appeared  necessary, 
first,  as  part  of  the  machinery  for  conserving  the 
American  money  market  and  making  their  dis- 
count rates  eflPective^  and  second,  as  a  method  of 
profitably  employing  their  funds  in  times  of  easy 
money,  when  member  banks  are  making  few  calls 
upon  them  for  rediscount.^  The  dealings  with 
the  outside  public  so  authorized  are  known  as 
"open-market  operations,"  and  are  provided  for 
in  section  14  of  the  Act.  Into  the  details  of  this 
important  section  we  need  not  go.    For  our  pur- 

5  If,  for  example,  a  federal  reserve  bank  raises  its  discount 
rate  in  order  to  prevent  dangerous  loan  expansion  pn^  the  part  of 
member  banks  or  to  prevent  an  undue  outflow  of  gqld^rom  the 
country,  it  may  happen  that  the  member  banks  may.-Jiot  be  con- 
vinced of  the  need  of  such  precautionar^measures,  and,  not  be- 
ing in  need  of  securing  funds  from  the  federal  reserve  bank  by 
way  of  rediscount,  may^gnore  th#  efforts  of  the  federal  reserve 
bank  to  conserve  the  money  market.  The  banks  may  accordingly 
continue  the  policy  oi^^^^  expansion  at  low  discount  rates. 
Under  such  circumstantj^^Bj^e^eral  reserve  rate  would  be  said 
to  be  "ineffective."  JUJj^^^B^is  situation  and  force  the  banks 
"into  line"  the  fe€erWf^KKm33,nk  may  go  into  the  open  market 

'and  sell  bank •acceptaipK^W)mmercial  biUs,  municipal  warrants 
and  government  bonds,  and,  by  withdrawing  from  the  market  the 
funds  received  in  payment  therefor,  may  tighten  the  market,  and 
foj'ce  up  the  discount  rate  thereby  bringing  the  market  rate  into 
harmony  with  the  federal  reserve  rate. 

6  In  the  early  days  of  the  federal  reserve  system  when  the 
member  banks  were  making  very  little  call  upon  the  federal  re- 
serve banks  for  rediscounts  or  other  advances,  the  federal  re- 
serve banks  invested  substantial  sums  in  municipal  warrants  and 
bank  acceptances  in  the  open  market,  and  by  that  means  covered 
a  large  part  of  their  running  expenses. 


FEDERAL  RESERVE  SYSTEM  43 

poses  it  is  sufficient  to  note  that  federal  reserve 
banks  may  buy  and  sell  in  the  open  market  either 
at  home  or  abroad  commercial  bills  of  exchange, 
bankers'  acceptances,  and  certain  specified  kinds 
of  government  obligations.  Under  this  authority 
a  federal  reserve  bank  in  one  section  of  the  coun- 
try may  buy  and  sell  eligible  commercial  paper 
and  government  securities  in  any  other  section  of 
the  country.  Such  dealings,  of  course,  tend  to 
cause  a  flow  of  reserve  money  from  the  district  of 
the  buygr  to  that  of  the  seller.  If  the  San  Fran- 
cisco federal  reserve  bank,  for  example,  buys 
$1,000,000  worth  of  trade  acceptances,  bank  ac- 
ceptances and  municipal  warrants  in  the  open 
market  in  New  York,  its  settlement  check  to 
whomever  paid  is  likely  to  be  deposited  in  a  New 
York  bank,  and  for  that  bank  to  be  collected  by 
the  New  York  federal  reserve  bank  from  the  San 
Francisco  federal  reserve  bank.  Unless  offset  by 
payments  in  the  other  direction,  the  payment  by 
San  Francisco  will  necessitate  a  transfer  of  re- 
serve money,  presumably  through  the  "gold  set- 
tlement fund,'-"^  from  San  Francisco  to  New 
York.  If  the  New  York  bank,  in  which  the  mil- 
lion dollar  check  was  originally  deposited,  leaves 
the  proceeds  on  depf'sit  with  the  New  York  fed- 
eral   reserve    bank,    federal    reserve    "reserve 

7  The  gold  settlement  fund  is  described  on  pages  76-77. 


44  THE  A  B  C  OF  THE 

money"  will  be  transferred  from  the  bank  in  San 
Francisco  to  the  bank  in  New  York.  In  this 
manner  open  market  operations  transfer  reserve 
money  from  places  of  redundancy  to  places  of 
scarcity,  and  tend  to  maintain  a  national  equi- 
librium in  our  money  rates. 

^Creation  of  a  Broader  Discount  Market  for  Com- 
mercial Paper 

The  third  method  by  which  the  federal  reserve 
system  is  rendering  more  mobile  our.  reserve 
money  is  through  the  creation  of  a  broader  dis- 
count market  for  conmiercial  paper.  As  we  have 
already  seen,  under  the  old  banking  system  the 
great  bulk  of  American  conmiercial  paper  was 
essentially  local  paper  with  little  or  no  market 
outside  of  the  community  in  which  it  was  created. 
The  federal  reserve  system  has  provided  the 
machinery  by  which  high  grade  commercial  paper 
can  be  rediscounted  throughout  the  United 
States,  and,  in  this  connection,  has  sought  to  en- 
courage by  preferential  discount  rates  and  other- 
wise the  use  of  trade  acceptances  and  bank  ac- 
ceptances— credit  devices  widely  used  in  Europe, 

When  the  seller  of  merchandise  draws  a  trade 
bill  upon  the  buyer  at,  say,  ^0  days  sight  for  the 
amount  of  the  bill,  and  t>..  buyer  writes  across 
its  face  "accepted"  and  J?igns  his  name  with  the 


FEDERAL  RESERVE  SYSTEM  45 

date  of  acceptance,  a  credit  instrument  is  created 
which  has  very  pronounced  advantages  over  the 
open-book  |^cn()iiQ^.4frnTn  the  standpoint  of  the 
seller,  the  buyer  and  the  bank.  The  seller  has  a 
definite  acceptance  of  the  goods  which  the  buyer 
cannot  question  in  the  future  without  very  good 
reason ;  he  has  a  promise  from  the  buyer  to  pay  at 
a  definite  date ;  and  he  has  the'  buyer's  obligation 
expressed  in  the  form  of  a  negotiable  instrument 
which  is  highly  liquid,  and  which  enjoys  prefer- 
ential rediscount  rates  at  all  federal  reserve  banks 
and  therefore  presumably  at  the  seller's  local 
bank  and  in  the  open  market.  The  buyer  of.  the 
merchandise  who  accepts  the  bill  places  his  credit 
standing  at  a  higher  level  than  it  would  be  if  he 
bought  on  open  book  account.  His  improved 
credit  should  enable  him  to  buy  on  better  terms. 
Having  his  accounts  thus  given  definite*  maturi- 
ties he  is  less  Hkely  to  be  tempted  to  overbuy  than 
he  would  be  under  the  loose  open-book  account 
method.  The  buyer  is  also  a  seller,  and  if  he 
uses  trade  acceptances  in  connection  with  his  pur- 
chases he  is  in  a  stronger  position  to  demand 
them  in  connection  with  his  sales ^  From  the 
banker's  point  of  view  the  trade  acceptance  is  an 
ideal  form  of  commercial  paper*  It  bears  two 
names,  usually  carries  with  it  evidence  that  it 
represents  a  self-hquidating  commercial  transac- 


46  THE  A  B  C  OF  THE 

tion  and  not  an  accommodation  loan,  it  is  almost 
certain  to  be  paid  at  maturity  and  not  to  seek 
renewal,  is  not  subject  to  the  provision  of  the 
national  banking  law  which  prohibits  a  national 
bank  from  loaning  to  one  customer  an  amount  in 
excess  of  ten  per  cent  of  the  bank's  capital  and 
surplus  (Revised  statutes,  section  5200),  and  it 
is  very  easy  to  turn  into  cash  before  maturity 
either  by  sale  in  the  open  market  or  by  rediscount 
at  a  federal  reserve  bank  because  of  the  prefer- 
ential discount  rates  given  such  paper.  The  trade 
acceptance  is  therefore  incomparably  more  liquid 
than  the  open-book  account,  and,  other  things 
equal,  is  more  liquid  than  one-name  paper. 

Even  more  liquid  than  the  trade  acceptance, 
because  the  acceptor  is  ordinarily  of  more  widely 
recognized  financial  standing,  is  the  domestic 
bank  acceptance  authorized  by  the  federal  re- 
serve law.^  The  bank  acceptance  is  similar  to  the 
trade  acceptance.  It  differs,  however,  in  the  f act^ 
that  the  seller  of  the  merchandise  draws  his  biir 
not  upon  the  buyer  but  upon  the  buyer's  bank, 
which  accepts  the  bill  for  the  buyer  whose  finan- 
cial standing  is  known  to  the  bank  and  who  has 
arranged  with  the  bank  in  advance  to  lend  him 
its  credit  in  this  way.    The  seller  of  the  merchan- 

8  The  statuatory  provisions   concerning  bank  acceptances   will 
be  found  in  section  13,  paragraph  5  of  the  federal  reserve  act. 


FEDERAL  RESERVE  SYSTEM  47 

disc  having  received  an  acceptance  of  the  bill 
from  the  buyer's  bank  may  discount  the  bill  at  his 
own  bank  or  sell  it  in  the  open  market  if  he  does 
not  wish  to  hold  it  until  maturity.  The  type  of 
domestic  bank  acceptance  made  eligible  for  re- 
discount at  federal  reserve  banks  covers  bills  hav- 
ing not  more  than  90  days,  exclusive  of  days  of 
grace  to  run  and  which  grow  out  of  transactions 
involving  the  domestic  shipment  of  readily 
marketable  staple  goods,  provided  that  docu- 
ments conveying  or  securing  title  are  attached  at 
the  time  of  acceptance. 

Inasmuch  as  bank  acceptances  and  high  grade 
Jirade  acceptajices.  enjoying  as  they  do  preferen- 
^tial  rates  of  discomit  at  the  federal  reserve  banks, 
have  a  wide  market,  their  increasing  use  is  caus- 
ing more  and  more  paper  to  flow  away  from  the 
banks  in  sections  of  the  country  where  the  dis- 
count rat^  is  relatively  high  to  be  discounted  in 
the  banks  of  those  sections  where  the  rate  is  rela- 
tively low.  Such  a  flow  of  commercial  paper 
from  the  dear  markets  to  the  cheap  ones,  obvi- 
ously causes  a  counter-flow  of  bank  reserves  from 
the  cheap  markets  to  the  dear  ones  and  thereby 
tends  to  reestablish  an  equilibrium  in  discount 
rates.  Of  course,  this  flow  is  not  an  absolutely 
free  one  and  perfect  equilibrium  is  never  ob- 
tained.   The  point  is,  however,  that  the  widening 


48  THE  A  B  C  OF  THE 

marketability  of  our  commercial  paper  under  the 
federal  reserve  system  is  making  this  flow  of  re- 
serve money  much  less  sluggish  than  it  was  for- 
merly. 

Intra-Distnct  Mobility  of  Reserves 

The  forces,  which  act  for  the  increasing  mo- 
bility of  reserve  money  within  the  boundaries  of 
a  federal  reserve  district,  are  essentially  the  same 
as  those  just  explained  for  that  between  districts. 
Obviously  paper  of  wide  acceptability  flows  from 
place  to  place  within  a  district  more  freely  than 
paper  whose  merits  are  less  widely  recognized; 
and,  within  a  district  as  between  districts,  the 
widely  marketable  paper  flows  from  the  places 
where  discount  rates  are  high  and  bank  funds  are 
scarce  to  the  places  where  the  rates  are  low  and, 
funds  are  more  plentiful.  Furthermore,  the 
bank  reserves  of  the  district  which  have  been 
piped  to  the  one  reservoir,  namely,  the  federal  re- 
serve bank,  can  be  readily  pumped  to  the  banks 
of  any  section  where  funds  are  in  heavy  demand. 
If  banks  throughout  the  district  were  rediscount- 
ing  in  moderate  sums. with  the  federal  reserve 
bank,  and  if  a  sudden  emergency  should  cause  an 
exceptionally  heavy  demand  for  funds  in  any  sec- 
tion, the  federal  reserve  bank  could  raise  its  rate 
of  discount,  thereby  reducing  the  rediscount  de- 


FEDERAL  RESERVE  SYSTEM  49 

mands  df  the  banks  less  urgently  in  need  of 
funds,  and  could  then  turn  larger  amounts  into 
the  section  where  the  demand  was  heaviest.  Ad- 
ditional funds  could  be  secured  by  the  federal  re- 
serve bank  within  the  district  (as  well  as  outside) 
by  the  sale  in  the  open  market  of  securities  held 
in  its  "secondary  reserve." 

In  the  illustrations  so  far  given  we  have  as- 
sumed a  fixed  amount  of  banking  funds,  and  have 
shown  how  these  funds  can  be  readily  mobilized 
under  the  federal  reserve  system  and  concentrated 
at  the  points  where  they  are  most  needed.  The 
problem  of  meeting  unusual  calls  for  banking 
funds  is,  however,  an  easier  one  under  the  federal 
reserve  system  than  the  above  discussion  implies. 
The  reason  is  that  under  the  new  system  there 
exist  in  addition  certain  elastic  elements  in  our 
supply  of  bank  funds.  These  will  be  considered 
in  the  next  chapter. 


CHAPTER  VII 

Credit  Elasticity  Under  the  Federal  Re- 
serve System 

Both  bank-note  currency  and  deposit  or  check 
currency  are  more  elastic  under  the  new  system 
than  under  the  old. 

Bond-Secured  Bank  Notes 

In  order  to  prevent  the  alleged  danger  of  an 
undue  contraction  of  the  currency  and  to  protect 
from  loss  the  banks  owning  the  two  per  cent 
bonds,  which  were  largely  pledged  with  the  Gov- 
ernment as  security  for  national  bank-note  circu- 
lation and  which  by  reason  of  the  circulation 
privilege  had  a  value  far  above  their  investment 
value,  the  Government  decided  not  to  withdraw 
from  circulation  at  once  the  old  bond-secured 
bank  notes.  The  federal  reserve  law  accordingly 
continued  the  circulation  of  these  notes,  but  con- 
tained provisions  looking  toward  their  gradual  re- 
tirementv  From  the  time  of  the  enactment  of  the 
federal  reserve  act  (December  23,  1913)  to 
March  1, 1918,  the  national  bank  notes  outstand- 

50 


FEDERAL  RESERVE  SYSTEM  51 

ing  were  reduced  from  $725  millions  represent- 
ing about  21  per  cent  of  our  total  monetary  cir- 
culation to  $718  millions,  representing  about  14 
per  cent.  To  this  sum  there  should  be  added,  to 
be  accurate,  $12  millions  of  so  called  federal  re- 
serve bank  notes,  rwhich  are  authorized  by  the 
federal  reserve  act^andWhich  are  merely  bond- 
secured  bank  notes  of  the  old  type  that  have  been 
taken  over  by  the  federal  reserve  banks  and  are 
issued  by  them  instead  of  by  the  national  banks. 
So  far  they  h^ve  been  of  comparatively  little  im- 
portance. 

Federal  Reserve  Notes 

The  notes  upon  which  the  federal  reserve  sys- 
tem places  its  sole  reliance  for  bank-note  elas- 
ticity are  the  so-called  federal  reserve  notes. 
These  notes,  which  are  obligations  of  the  United 
States  Government  and  are  "first  and  paramount 
lien  on  all  the  assets"  of  the  issuing  federal  re- 
serve banks,  have  back  of  them  specifically 
pledged  with  the  federal  reserve  agent  to  the 
amount  of  100  per  cent  certain  forms  of  high 
grade  collateral^  This  collateral  may  consist  of : 
(1)  Paper  endorsed  by  member  banks  and  drawn 
for  strictly  commercial,  industrial  or  agricultural 
purposes,  or  for  the  purpose  of  carrying  or  trad- 
ing in  securities  of  the  United  States  Govern- 


52  THE  A  B  C  OF  THE 

ment,  in  other  words,  paper  of  the  type  hereafter 
described^  which  is  ehgible  for  rediscount  at  a 
federal  reserve  bank.  (2J  Bills  of  exchange  en- 
dorsed by  a  member  bank  and  bankers'  accept- 
ances bought  by  the  federal  reserve  bank  in  the 
open  market.     (3)  Gol3  and  gold  certificates, 

Except  under  special  circumstances,  to  be  con- 
sidered later,^  a  gold  reserve  of  not  less  than  40 
per  cent  must  be  kept  by  each  federal  reserve 
bank  against  its  outstanding  federal  reserve 
notes.  Gold  specifically  pledged  with  the  federal 
reserve  agent  as  collateral  for  the  notes  may  be 
counted  in  making  up  this  40  per  cent  reserve,  as 
may  also  gold  kept  in  the  redemption  fund  with 
the  treasurer  of  the  United  States  at  Washing- 
ton for  the  redemption  of  the  notes. 

Elasticity  of  Federal  Reserve  Notes 

As  regards  the  matter  of  elasticity,  these  notes 
have  in  a  high  degree  the  quality  of  expansibil- 
ity, namely,  of  having  their  circulation  easily  in- 
creased in  times  of  need.  If  member  banks  in  a 
given  section  of  the  country  need  an  increased 
supply  of  currency  to  meet  local  demands,  they 
may  rediscount  eligible  paper  with  their  federal 
reserve  bank  and  take  the  proceeds  of  the  redis- 

1  Pages  61-63. 

2  Pages  53-54. 


FEDERAL  RESERVE  SYSTEM  63 

counts  in  federal  reserve  notes,  which  pass  read- 
ily as  hand-to-hand  money  and  are  satisfactory 
till  money  for  the  banks.  The  federal  reserve 
bank,  if  its  supply  of  notes  is  inadequate,  secures, 
on  application  to  the  federal  reserve  agent,  addi- 
tional notes  by  depositing  with  the  agent  the  re- 
discounted  paper  or  other  eligible  paper  in  its 
portfolio.  This  process  may  continue  as  long 
as  the  federal  reserve  bank  has  paper  available 
for  deposit  with  the  federal  reserve  agent  and 
its  gold  reserve  does  not  fall  below  the  normal 
legal  minimum  of  40  per  cent.  In  case  of  great 
emergency,  however,  the  federal  reserve  board 
may  permit  a  reduction  of  the  note  reserve  below 
40  per  cent,  provided  it  imposes  a  graduated  tax 
upon  the  amount  of  the  deficiency — a  tax  which 
must  be  added  to  the  rates  of  interest  and  dis- 
count fixed  by  the  federal  reserve  board.  Fur- 
thermore, to  meet  extreme  emergencies  the  board 
is  authorized  "to  suspend  for  a  period  not  exceed- 
ing thirty  days,  and  from  time  to  time  to  renew 
such  suspension  for  periods  not  exceeding  fifteen 
days  any  reserve  requirement"  specified  by  the 
Act.  It  is  thus  seen  that  the  federal  reserve  notes 
have  ample  power  of  expansion  in  time  of  emer- 
gency and  that  there  no  longer  exists  a  stone-wall 
limit  beyond  which  expansion  cannot  go  and  go 
promptly.    There  is  no  fixed  limit,  but  beyond  a 


64  THE  A  B  C  OF  THE 

certain  point  further  expansion  can  be  secured 
only  at  a  rapidly  increasing  expense  to  those 
wishing  the  notes. 

The  note  issue  of  the  twelve  federal  reserve 
banks  amounted  to  $1,465  miUions  on  March  1, 
1918.  Back  of  these  notes  there  was  held  by  the 
twelve  federal  reserve  agents  the  following  col- 
lateral : 

Millions 

(1)  Gold  coin  and  certificates $277 

(2)  Gold  in  redemption  fund  at 
Washington 50 

(3)  Gold  with  federal  resei*ve  board     559 

(4)  Eligible  paper,  (representing 
$204  millions  above  the  minimum 
required  by  law) 783 

Total   $1669 

These  figures  show  that  53  per  cent  of  the  fed- 
eral reserve  notes  outstanding  were  backed  dol- 
lar for  dollar  by  gold  collateral.  The  total  gold 
resources  of  the  twelve  federal  reserve  banks  on 
the  above  date  were  $1,777  millions,  which  on  the 
basis  of  the  40  per  cent  reserve  required  by  law 
would  represent  a  gold  reserve  sufficient  for 
$3,333  millions  federal  reserve  notes,  after  set- 
ting aside  the  legal  minimum  lawful  money  re- 


FEDERAL  RESERVE  SYSTEM  55 

serve  of  35  per  cent  against  deposits.  This 
would  more  than  double  the  amount  at  present 
outstanding.  Obviously  there  still  resides  in  the 
federal  reserve  system  the  power  of  very  great 
note  expansion — a  power  which,  in  the  present 
conditions  of  currency  and  credit  inflation,  should' 
be  used  with  great  caution. 

For  tjie  purpose  of  contracting  the  circulation 
of  federal  reserve  notes  when  the  business  de- 
mands for  currency  decline,  the  machinery  is  as 
follows.  When  the  demand  for  notes  in  the 
pockets  of  the  people  and  the  tills  of  merchants 
falls  off,  as  it  does,  say,  after  the  harvesting  sea- 
son in  the  autumn,  the  surplus  notes  are  deposited 
by  the  public  in  the  banks.  Inasmuch  as  national 
banks  cannot  count  these  notes  in  their  vaults  as 
legal  reserve  money,  they  will  tend  to  send  to  \ 
their  federal  reserve  baijks  for  deposit  any  notes 
they  receive  in  excess  of  the  amount  needed  for 
till  money.  Notes  wliich  were  issued  by  the  fed- 
eral reserve  bank  of  the  district  may  thus  be  with- 
drawn from  circulation.  Notes  so  received  which 
were  issued  by  other  federal  reserve  banks  8T*e 
sent  back  to  the  issuing  banks.  On  this  subject 
the  law  says:  "Whenever  federal  reserve  notes 
issued  through  one  federal  reserve  bank  shall  be 
received  by  another  federal  reserve  bank,  they 
shall  be  promptly  returned  for  credit  or  redemp- 


56  THE  A  B  C  OF  THE 

tion  to  the  federal  reserve  bank  through  which 
they  were  originally  issued  or,  upon  direction  of 
such  federal  reserve  bank,  they  shall  be  forwarded 
direct  to  the  Treasurer  of  the  United  States,  to 
be  retired.  No  federal  reserve  bank  shall  pay 
out  notes  issued  through  another  under  penalty 
of  a  tax  of  ten  per  centum  upon  the  face  value  of 
notes  so  paid  out"  (Section  16).  This  require- 
ment that  federal  reserve  banks  shall  send  back 
promptly  the  notes  of  other  federal  reserve  banks 
will  obviously  increase  in  its  effectiveness  as  a 
means  of  currency  contraction  with  the  increase 
in  the  number  of  branches  of  federal  reserve 
banks  established  throughout  the  country. 

Another  device  calculated  to  encourage  the  re- 
tirement from  circulation  of  bank  notes  whenever 
they  become  redundant  is  the  provision  of  the 
law  authorizing  the  federal  resei^ve  board  to 
charge  such  a  rate  of  interest  as  it  may  deem  de- 
sirable on  federal  reserve  notes  uncovered  by 
gold  or  gold  certificates  issued  to  federal  reserve 
i)anks. 

The  fact  that  federal  reserve  notes  are  not 
nder  is  believed  by  some  to  exercise  an  in- 
liuence  in  the  direction  of  .'pausing  their  retire- 
ment when  they  ber*nr>i,-  redundant.  In  view  of 
the  fact,  however  i  question  of  legal  ten- 

der is  rarely  rai^^  onnectlon  \\ith  money 


J^A' 


FEDERAL  RESERVE  SYSTEM  57 

which  is  not  depreciated,  it  is  doubtful  if  the  lack 
of  legal  tender  adds  anything  to  the  "homing 
.quality"  of  the  notes. 

Elasticity  of  Deposit  Currency 

Elasticity  of  deposit  currency,  although  it  has 
not  received  the  attention  in  our  economic  liter- 
ature received  by  elasticity  of  bank-note  cur- 
rency, is  of  greater  importance  because  the 
jamount  of  business  done  by  means  of  deposit  cur- 
rency is  many  times  larger  than  that  done  by 
means  of  bank  notes.*  Prior  to  the  establishment 
of  the  federal  reserve  system,  as  we  have  seen,* 
our  deposit  currency,  although  not  as  inelastic  as 
our  bank-note  currency,  was  none  the  less  defi- 
cient in  the  quality  of  elasticity*  How  has  'he 
federal  reserve  system  remedied  this  defect? 

We  have  just  seen  how  by  increasing  the  mo- 
bility of  bank  reserves,  the  federal  reserve  system 
has  enabled  bank  funds  in  the  form  cf  deposit 

3  The  estimates  of  Professo*-  Irving  Fisiier  give  for  the  year 
1913,  the  last  antebellum  >K,.tr,  the  average  rate  of  monetary- 
turnover  for  the  country  as  21,  and  the  total  amount  of  business 
effected  by  deposit  currency  as  $440  billion.  The  bank-note  cir- 
culation for  July  1  of  that  year  was  $759  million,  which  multi- 
plied by  the  average  rate  of  monetary  turnover  would  give  the 
total  business  transacted  by  means  of  bank  notes  as  $16  billion, 
or  a  sum  equal  to  only  1/27  of  that  transacted  by  means  of  de- 
posit currency. 

4  See  pages  17-18. 


58  THE  A  B  C  OF  THE 

credits  to  flow  quickly  to  any  section  of  the  coun- 
try where  bank  funds  are  much  needed.  This 
mobility  of  funds  is  often  spoken  of  as  deposit- 
credit  elasticity.  In  the  present  discussion,  how- 
ever, we  are  using  the  word  elasticity  in  its  stricter 
sense  of  "expansibihty  and  contractility,"  and 
do  not  include  in  the  term  mere  mobility  of  funds, 
namely,  their  capacity  to  move  quickly  and  with 
little  friction  from  one  place  to  another. 

The  federal  reserve  system  increases  the  elas- 
ticity of  our  deposit  currency  in  a  number  of 
ways.  In  the  first  place,  it  has  removed  the  rigid 
legal  reserve  requirements  of  our  former  national 
banking  system  and  has  put  in  their  place  much 
l»^ss  rigid  ones.  The  only  legal  reserves  now  re- 
qi  ired  of  national  banks  are  the  deposited  re- 
serves in  the  federal  reserve  bank.  For  till  money 
banks  are  permitted  to  hold  in  their  own  vaults 
as  muci?  or  as  little  money  as  they  individually 
need,  and  the  kinds  of  money  they  desire. 

Federal  N^serve  bank.5  in  turn  are  required  to 
keep  against  deposits  a  legal  reserve  of  lawful 
money  equivalent  to  35  per  cent.  Unlike  mem- 
ber banks,  however,  the  federal  reserve  banks  are 
not  strongly  pressed  by  competition  and  by  the 
desire  for  profits  to  take  up  all  the  slack  and  re- 
duce their  reserves  in  ordinary  times  to  this  nor- 
mal legal  minimum.    There  has  been  no  evidence 


FEDERAL  RESERVE  SYSTEM  59 

that  federal  reserve  banks  will  keep  their  credit 
extended  to  the  legal  limit,  as  individual  banks 
have  so  widely  done  in  the  past.  Despite  the 
urgent  need  of  funds  brought  about  by  war  con- 
ditions, our  federal  reserve  banks  have  adopted 
the  policy  of  maintaining  reserves  far  above  the 
legal  minimum.  They  have  little  profiteering 
motive  to  reduce  their  reserves  to  a  dangerously 
low  figure,  because  all  the  profits  of  federal  re- 
serve banks  above  a  six  per  cent  cumulative  divi- 
dend to  the  stock  owned  by  member  banks  go  to 
the  Government.^  Fortunately  there  has  ap- 
peared no  evidence  of  competition  among  the 
federal  reserve  banks  to  see  which  can  show  the 
largest  profits.  Under  the  leadership  of  the  fed- 
eral reserve  board,  the  great  emphasis  has  been 
on  competition  for  public  service.  The  result  is 
that  the  federal  reserve  banks  have  been  con- 
serving their  strength  for  times  of  en  ergency. 
Under  such  circumstances  the  federal  reserve 
banks  should  have  substantial  powers  of  credit 
expansion  to  call  upon  in  times  of  emergency, 
before  their  reserve  position  is  forced  down  to 
anything  like  the  35  per  cent  legal  limit. 

5  The  law  provides  for  the  accumulation  out  of  profits  of  a  40 
per  cent  surplus ;  but  upon  the  liquidation  of  a  federal  reserve 
bank  or  the  withdrawal  of  a  member  bank  none  of  this  surplus 
goes  to  the  member  banks.  Ultimately  it  all  goes  to  the  Govern- 
ment. 


60  THE  A  B  C  OF  THE 

^      ,      ,    ,     , 
This  limit  itself,  however,  is  not  a  rigid  one. 

It  may  be  passed  in  times  of  extreme  emergency, 
although  only  by  paying  a  price.  The  federal 
reserve  law  provides,  as  we  have  previously 
noted,  that  the  federal  reserve  board  may  "sus- 
pend for  a  period  not  exceeding  thirty  days,  and 
from  time  to  time  .  .  .  renew  such  suspension  for 
periods  not  exceeding  fifteen  days,  any  reserve 
requirement  specified  in  this  act:  'provided y  that 
it  shall  establish  a  graduated  tax  upon  the 
amounts  by  which  the  reserve  requirements" 
against  deposits  are  permitted  to  fall  below  the 
level  of  35  per  cent  (Section  11).  Inasmuch  as 
this  tax  would  presumably  be  added  to  the  rate  of 
discount  charged  by  the  reserve  bank,  there  would 
be  an  increasingly  heavy  charge  upon  loans  made 
wheii  the  reserve  was  below  the  normal  legal 
minimum.  None  the  less,  such  loans  could  be 
made  wj'^^hout  limit  to  those  who  could  give  the 
security  and  would  pay  the  price. 

The  most  important  device  of  the  federal  re- 
serve system  for  securing  elasticity  of  deposit 
currency,  as  well  as  of  bank-note  currency,^  is 

6  A  member  bank,  say  a  country  bank,  whose  reserve  is  in 
danger  of  running  below  the  7  per  cent  of  demand  deposits,  and 
3  per  cent  of  time  deposits,  required  by  law,  or  which  is  in  need 
of  more  cash  for  till  money,  may  take,  say  $10,000  of  its  eligible 
commercial  paper  to  its  federal  reserve  bank  and  have  it  re- 
discounted  for,  say,  60  days  at  4^4  per  cent.    The  proceeds  would 


FEDERAL  RESERVE  SYSTEM  61 

'found  in  the  machinery  enabling  member  banks 
to  borrow  funds  of  their  federal  reserve  bank. 
Funds  so  borrowed,  when  left  on  deposit  with  the 
federal  reserve  bank,  serve  as  legal  reserve  money 
for  the  member  banks,  ^he  making  of  such  loans 
to  member  banks  is  one  of  the  chief  functions  of 
federal  reserve  banks.  Broadly  speaking  the 
loans  are  of  two  kinds,  rediscounts,  and  loans  on 
collateral.  Let  us  consider  briefly  each  of  these 
types  of  loans. 

'  Rediscount 

Federal  reserve  banks  always  stand  ready  to./ 
rediscount  in  time  of  need  eligible  paper  for  mem- 
ber  banks. 

For  the  purpose  of  keeping  the  a^^sets  of  fed- 
eral reserve  banks  liquid,  the  law  and  the  ad- 
ministrative regulations  of  the  federal  reserve 
authorities  place  rigid  limitations  upon  the  kinds 
of  paper  eligible  for  rediscount.  These  limita- 
tions have  reference  both  to  the  length  of  time 
the  paper  is  to  run,  and  to  the  purpose  for  which 
it  is  issued.    As  to  time,  notes  rediscounted  must 

be  $9,925,  which  at  7  per  cent  would  represent  a  legal  reserve 
sufficient  for  $141,714  of  demand  deposits,  and  would  therefore 
greatly  increase  the  bank's  lending  power.  Any  part  of  the  pro- 
ceeds of  the  rediscount  in  excess  of  that  needed  to  maintain  the 
bank's  7  per  cent  legal  reserve  with  the  federal  reserve  bank 
could  be  checked  against  and  taken  in  cash,  presumably  in  fed- 
eral reserve  notes,  for  the  bank's  till  money. 


62  THE  A  B  C  OF  THE 

have  a  maturity  at  the  time  of  rediscount  of  not 
more  than  90  days  (exclusive  of  days  of  grace) ; 
except  that  a  Hmited  amount  of  bills  drawn  for 
agricultural  purposes  or  based  on  live  stock  may 
be  rediscounted,  provided  they  have  a  maturity 
not  exceeding  six  months  (exclusive  of  days  of 
grace) .  As  to  the  purpose  for  which  the  bills  are 
issued,  the  law  limits  rediscounts  to  two  classes  of 
paper.  They  are :  ( 1 )  Notes,  drafts  and  bills  of 
exchange  bearing  the  endorsement  of  a  member 
bank  and  "arising  out  of  actual  commercial  trans- 
actions," that  is,  issued  or  drawn  "for  agricul- 
tural, industrial,  or  commercial  purposes,  or  the 
proceeds  of  which  have  been  used,  or  are  to  be 
used  for  such  purposes";  and  (2)  Notes,  drafts 
and  bills  of  exchange  bearing  the  endorsement  of 
a  member  bank  and  issued  or  drawn  for  the  pur- 
pose of  carrying  or  trading  in  "bonds  and  notes 
of  the  Government  of  the  United  States."  Ex- 
cept for  United  States  Government  securities, 
the  law  specifically  prohibits  the  rediscounting 
by  federal  reserve  banks  of  paper  issued  or 
drawn  "for  the  purpose  of  carrying  or  trading  in 
stocks,  bonds,  or*other  investment  securities." 

>  /  Collateral  Loans 
The  second  type  of  loan  is  the  discount  of  col- 
vilateral  notes  of  member  banks.    These  notes  must 
be  for  periods  not  exceeding  fifteen  days,  and  the 


i 


FEDERAL  RESERVE  SYSTEM  63 

only  permissible  collateral  is  "such  notes,  drafts, 
bills  of  exchange,  or  bankers'  acceptances  as  are 
eligible  for  rediscount  or  for  purchase  by  federal 
reserve  banks,"  and  bonds  or  notes  of  the  United 
States  Government.  There  was  no  provision  in 
the  original  act  for  collateral  loans,  but  experi- 
ence soon  showed  that  member  banks  frequently 
wished  to  secure  from  federal  reserve  banks  ad- 
vances for  brief  periods,  so  brief  that  they  were 
reluctant  to  rediscount  customers'  paper  for  the 
purpose.  To  meet  the  difficulty  an  amendment 
to  the  federal  reserve  act  was  passed  September 
7,  1916,  authorizing  these  short-time  collateral 
loans.  The  authority  to  make  such  loans  has 
proven  to  be  particularly  useful  in  connection 
with  the  financing  by  the  banks  of  Liberty  bond 
purchases  either  for  themselves  or  for  their  cus- 
tomers— purchases  which  are  likely  to  involve 
heavy  drains  upon  the  banks  for  very  brief  per- 
iods. During  the  year  1917  these  collateral  loans 
constituted  by  far  the  most  important  form  of 
advance  made  by  federal  reserve  banks  to  mem- 
ber banks.  "^  ^ 

7  "Discounts  for  the  calendar  year  1917  aggregated  8,968.8  mil- 
lions, as  against  307.9  millions  in  1916.  Of  the  total  for  the  more 
recent  year,  7,744.5  millions,  or  86.3  per  cent,  were  collateral 
notes,  while  37.5  millions  were  reported  as  trade  acceptances, 
12.9  millions  as  commodity  paper,  and  1,11^.9  millions  as  custo- 


'i 


\ 


64  THE  A  B  C  OF  THE 

Contraction  of  Circulating  Credit 
So  far  we  have  been  speaking  of  the  elasticity 
of  deposit  currency  under  the  new  banking  sys- 
tem in  the  direction  of  expansion  in  times  of  in7 
creasing  currency  demand.  The  contraction  of 
deposit  currency,  as  soon  as  the  need  for  it 
I  IJ  falls  off,  is  brought  about  by  the  pressure  of 
high  discount  rates,  to  which  the  pressure  of  the 
graduated  tax  is  added.  This  double  pressure 
encourages  borrowers  to  pay  off  their  loans^ 
This  fact,  and  the  increasing  restrictions  which 
federal  reserve  banks  place  upon  rediscounts  as 
money  market  conditions  become  easier,  tend 
^o  contract  the  circulation  of  deposit  currency 
and  restore  the  reserves  to  a  normal  condition. 
In  this  respect  a  great  public  responsibility 
rests  upon  the  federal  reserve  authorities  to 
conserve  the  banking  strength  of  the  country 
in  times  of  easy  money,  so  that  it  can  be  called 
upon  in  times  of  emergency.    Some  critics  of  the 

mers'  paper,  including  bills  secured  by  Liberty  bonds  and  certifi- 
cates of  indebtedness." 

About  the  end  of  the  year  1917  there  was  a  substantial  decline 
in  the  amount  of  these  collateral  notes  discounted — a  decline  "due 
apparently  in  part  to  the  provision  in  the  war  revenue  act  of 
October  3,  effective  December  1,  which  imposes  a  tax  of  2  cents 
per  $100  or  any  fractional  part  thereof  on  promissory  notes 
(held  to  include  collateral  notes  tendered  for  discount  to  fed- 
eral reserve  banks)."  See  Federal  Reserve  Bulletin,  February  1, 
1918,  pages  134-135. 


FEDERAL  RESERVE  SYSTEM  65 

federal  reserve  system  believe  that  the  machinery 
it  provides  for  contracting  both  deposit  and  bank- 
note currency,  in  times  of  currency  redundancy, 
needs  strengthening.  Upon  this  subject  it  is 
difficult  as  yet  to  pass  a  safe  judgment  because 
times  have  been  so  abnormal  since  the  system 
went  into  operation. 

There  is  no  question  but  that  the  federal  re- 
serve system  has  added  greatly  to  the  elasticity  of 
both  our  deposit  currency  and  our  bank-note 
currency. 


CHAPTER  VIII 

Domestic  and  Foreign  Exchange  Under  the 
Federal  Reserve  System 

We  may  now  pass  to  the  consideration  of  how 
the  federal  reserve  system  is  meeting  the  difficul- 
ties of  the  old  banking  regime  as  regards  do- 
mestic and  foreign  exchange.  Domestic  ex- 
change will  be  considered  first. 

Domestic  Exchange 

Under  the  old  regime  the  collection  and  clear-""" 
ing  of  out-of-town  checks  for  country  banks  was 
handled  largely  by  the  banks  in  reserve  and  cen- 
tral reserve  cities,  which  were  the  depositories  of 
the  legal  reserves  of  the  country  banks.  The  ser- 
vice of  collecting  these  out-of-town  checks  was 
rendered  to  the  country  bank  as  a  partial  com- 
pensation for  the  use  of  its  reserve  deposits  at  a 
low  rate  of  interest,  and  as  a  lure  to  secure  other 
business  from  the  country  bank,  competition  hav- 
ing been  keen  among  large  banks  in  money  mar- 
ket centers  for  the  accounts  of  out-of-town  banks. 
When  Congress  decided,  therefore,  that  the  sys- 

66 


FEDERAL  RESERVE  SYSTEM  67 

tern  of  pyramiding  the  legal  reserves  of  national 
banks  by  permitting  them  to  be  deposited  to  a 
large  extent  in  other  national  banks  was  a  bad 
one  and  should  be  done  away  with,  it  was  natur- 
ally forced  to  provide  a  machinery  to  take  the 
place  of  the  reserve  and  central  reserve  city  cor- 
respondent banks  for  the  work  of  collecting  out- 
of-town  checks.  If  the  country  bank  was  no 
longer  to  be  permittee-  to  count  a  deposit  with  its 
city  correspondent  as  legal  reserve  money,  but 
was  to  be  compelled  to  maintain  its  entire  legal 
reserve  on  deposit  with  its  federal  reserve  bank, 
it  would  naturally  withdraw  or  at  least  greatly 
reduce  its  deposit  balance  with  its  correspondent 
banks.  But  under  such  circumstances  who  would 
collect  its  out-of-town  checks  and  otherwise  serve 
it  in  connection  with  out-of-town  business?  The 
city  bank,  no  longer  holding  the  country  bank's 
reserve  deposits,  would  no  longer  be  disposed  to 
perform  without  charge  these  services  for  the 
country  bank;  and  further,  having  ceased  to  be 
the  country  bank's  reserve  agent,  the  city  bank 
would  be  very  likely  to  compete  for  some  of  the 
country  bank's  most  attractive  business.  Obvi- 
ously if  the  new  federal  reserve  banks  were  to 
displace  city  correspondent  banks  as  the  holders 
of  the  country  banks'  deposited  reserves,  they 
should  also  perform  for  the  country  banks  the 


68  THE  A  B  C  OF  THE 

service  of  collecting  or  clearing  their  out-of-town 
^h'ecks/  To  this  end  the  federal  reserve  act  pro- 
vides that  the  federal  reserve  board  "may  at  its 
discretion  exercise  the  functions  of  a  clearing 
house  for  .  .  .  federal  reserve  banks,  or  may 
designate  a  federal  reserve  bank  to  exercise  such 
functions,  and  may  also  require  each  such  bank  to 
exercise  the  functions  of  a  clearing  house  for  its, 
member  banks"  (Section  16).  The  same  section 
of  the  law  also  requires  federal  banks  to  "receive 
on  deposit  at  par  from  member  banks  or  from 
federal  reserve  banks  checks  and  drafts  drawn 
upon  any  of  its  depositors,  and  when  remitted  by 
a  federal  reserve  bank,  checks  and  drafts  drawn 
by  any  depositor  in  any  other  federal  reserve 
bank  or  member  bank  upon  funds  to  the  credit  of 
said  depositor  in  said  reserve  bank  or  member 
Ijank." 

Member  banks  are  permitted  to  make  collec- 
tion and  exchange  charges  on  customers  sufficient 
to  cover  the  actual  expenses  involved  in  the  col- 
lection and  remittance  of  funds.    The  federal  re- 

1  Dr.  iH.  Parker  Willis,  Secretary  of  the  Federal  Reserve 
Board,  states  concisely  the  distinction  between  collecting  and 
clearing  checks,  as  follows:  "A  check  Is  said  to  be  collected  when 
it  is  sent  home  to  the  bank  on  which  it  is  drawn,  and  arrange- 
ment is  made  to  remit  the  proceeds;  it  is  said  to  be  cleared  when 
the  bank  receiving  it  oflFsets  it  against  checks  in  favor  of  the  in- 
stitution by  which  it  is  to  be  paid,  and  then  collects  or  remits 
only  the  balance,  if  any."    The  Federal  Reserve,  page  223. 


FEDERAL  RESERVE  SYSTEM  69 

serve  board  is  authorized  to  fix  collection  charges 
for  items  handled  through  federal  reserve  banks. 
The  problem  of  establishing  a  satisfactory- 
clearing  and  collection  system  was  looked  upon 
as  perhaps  the  most  difficult  and  complicated  one 
confronting  the  federal  reserve  authorities  in  the 
early  days  of  the  new  system.  At  first  the  fed- 
eral reserve  authorities  moved  slowly  and  allowed 
the  different  reserve  banks  a  wide  discretion  in 
the  matter  of  arrangements  for  the  clearing  and 
collection  of  checks.  Moreover,  in  most  districts 
the  utilization  of  the  clearing  and  collection  sys- 
tem established  by  the  federal  reserve  bank  was 
optional  with  member  banks.  Some  joined  the 
system  and  many  did  not.  It  early  became  evi- 
dent that  to  be  really  effective  a  clearing  and  col- 
lection system  needed  to  be  approximately  imi- 
f  orm  in  its  workings  throughout  the  country  and 
to  embrace  the  largest  possible  number  of  banks ; 
a  system  in  which  a  moderate  number  of  banks 
utilized  the  federal-reserve  clearing  and  collec- 
tion system  and  a  large  number  handled  their 
checks  in  the  old  way  was  unsatisfactory.  It 
meant  a  wasteful  duplication  of  machinery  an- 
alogous to  that  which  exists  when  a  city  has  two 
separate  telephone  services.  After  nearly  two 
years  of  experimentation,  thereTorej  the  federal 
reserve  -  board  promulgated  a  clearing  and  col- 


70  THE  A  B  C  OF  THE 

lection  system,  which  was  put  into  operation  July 
5,  1916,  in  all  federal  reserve  districts — a  system 
whose  privileges  under  certain  limitations  were 
extended  by  an  amendatory  act  of  June  21,  1917, 
to  qualifying  banks  which  are  not  regular  mem- 
bers of  the  federal  reserve  system. 

Present  Clearing  and  Collection  System 

Briefly  summarized,  the  main  features  of  the 
new  plan,  as  revised  to  date  (March  1,  1918) 
are  as  follows:^ 

Each  federal  reserve  bank  exercises  the  func- 
tions of  a  clearing  house  in  its  district  for  mem- 
ber banks  and  for  qualified  non-member  banks, 
known  as  "clearing  member  banks."  From  such 
banks  in  its  district  the  federal  reserve  bank  will 
receive  at  par  "checks  drawn  on  all  member  and 
clearing  member  banks  and  on  all  other  non- 
member  banks,  which  agree  to  remit  at  par 
through  the  federal  reserve  bank  of  their  dis- 
trict." Clearing  and  collection  services  for  mem- 
ber and  clearing  member  banks  and  for  other  fed- 
eral reserve  banks  are  also  rendered  by  each  fed- 
eral reserve  bank  in  the  case  of  checks  received 
from  outside  the  district  which  are  drawn  upon 

2  The  Federal  Reserve  Board's  revised  regulations  concerning 
the  clearing  and  collection  of  checks  constitute  "Regulation  J, 
Series  of  1917,"  and  are  published  in  the  Federal  Reserve  Bulle- 
tin of  July  1,  1917,  pages  549-550, 


FEDERAL  RESERVE  SYSTEM  71 

member  and  clearing  member  banks  of  its  dis- 
trict and  upon  all  other  non-member  banks  of  its 
district,  whose  checks  can  be  collected  at  par  by 
the  federal  resi^re  bank.  These  two  provisions 
make  the  field  of  the  par  clearing  and  collection 
system  coextensive  with  the  United  States  and 
provide  a  machinery  for  the  handling  of  checks 
received  from  practically  all  important  points 
without  the  district  as  well  as  from  within  the  dis- 
trict. All  banks  belonging  to  the  clearing  system 
are  required  to  pay  without  deduction  checks 
drawn  upon  themselves,  when  presented  at  their 
own  counters.  On  January  15,  1918,  there  be- 
longed to  the  federal  reserve  clearing  system 
7,622  member  banks  and  8,130  clearing  member 
banks,  together  representing  approximately  half 
the  banks  of  the  country.^  At  that  time  the  fed- 
eral reserve  clearing  system  was  handling  about 
360,000  checks  daily  (exclusive  of  those  drawn 
on  the  Treasurer  of  the  United  States)  repre- 
senting approximately  $270,000,000,  or  a  sum 
equal  to  between  one-third  and  one- fourth  of  the 
total  clearings  of  all  the  clearing  houses  of  the 
country. 

The  old  evil  previously  described  ( pages  21-22) 
of  carrying  the  "float"  as  a  part  of  a  bank's  legal 
reserve  is  eliminated  by  a  provision  to  the  effect 

3  Federal  Reserve  Bulletin,  February  1,  1918,  page  75. 


72  THE  A  B  C  OF  THE 

that,  although  checks  received  by  the  federal  re- 
serve bank  will  be  immediately  credited  (subject 
to  final  payment)  to  the  bank  sending  them,  the 
proceeds  thereof  "will  not  be  counted  as  part  of 
the  minimum  reserve,  nor  become  available  to 
meet  checks  drawn  until  actually  collected."  If 
the  bank  sending  in  checks  is  not  to  be  permitted 
to  draw  against  the  credit  which  they  create  until 
they  have  been  collected,  obviously  the  checks 
should  not  be  charged  by  the  federal  reserve  bank 
against  the  reserve  account  of  the  bank  upon 
which  they  are  drawn  until  sufficient  time  has 
elapsed  "for  the  checks  to  have  reached  the  mem- 
ber bank  and  for  returns  in  due  course  to  have 
reached  the  federal  reserve  banks."*  This  is  the 
rule  now  in  force. 

If  a  bank's  deposit  at  the  federal  reserve  bank 
is  insufficient  to  cover  its  legal  reserve  require- 
ment and  in  addition  to  meet  an  adverse  balance, 
which  arises  against  it  out  of  clearing  operations, 
it  is  authorized  to  ship  currency  or  specie  from 
its  own  vaults  at  the  expense  of  its  federal  reserve 
bank  in  order  to  cover  the  deficiency.  In  case  of 
a  deficient  balance  at  the  federal  reserve  bank, 
the  member  bank,  of  course,  also  has  the  privi- 
lege of  making  good  the  deficiency  by  rediscount- 

4  See  Third  Annual  Report  of  Federal  Reserve  Board,  191(5, 
pages  9-13. 


FEDERAL  RESERVE  SYSTEM  73 

ing  eligible  papey  or  by  discounting  with  the  fed- 
eral reserve  bank  its  own  fifteen  day  notes  se- 
cured by  eligible  collateral. 

In  handling  items  for  member  and  clearing 
member  banks,  a  federal  reserve  bank  acts  as 
agent  only. 

Under  the  federal  reserve  clearing  and  collec- 
tion system  checks  are  sent  to  federal  reserve 
banks  and  to  member  and  clearing  member  banks 
by  the  most  direct  routes,  and  the  number  of  par 
collection  points  in  the  United  States  is  made 
almost  equal  to  the  number  of  places  of  any  con- 
siderable size  where  commercial  banks  are  lo- 
cated. The  result  is  that  the  new  system  is  rap- 
idly doing  away  with  the  old  evil  of  routing 
checks.  *        '  ' 

The  cost  of  collecting  and  clearing  checks  is 
borne  by  the  banks  receiving  the  benefit  and  in 
proportion  to  the  service  rendered.  An  account 
is  kept  by  each  federal  reserve  bank  of  the  cost 
of  performing  the  service,  and  the  federal  reserve 
board  fixes  the  charge  at  so  much  per  item  that 
may  be  imposed  for  the  service.  A  charge  not 
exceeding  2  cents  per  item  has  been  authorized 
by  the  board.  Up  to  date  the  usual  charge  is 
Ij  cents  per  item;  although  in  some  cases  it  is  as 
low  as  1  cent  and  in  some  as  high  as  2  cents.*^ 

5  See  Federal  Reserve  Bulletin,  July  1,  1916,  page  31*4. 


74  THE  A  B  C  OF  THE 

Inasmuch  as  qualified  banks  may  use  the  federal 
reserve  clearing  and  collection  system  or  not,  as 
they  wish,  and  to  the  extent  that  they  wish,  it  fol- 
lows that  the  charge  can  be  assessed  against  a 
bank  only  to  the  extent  that  it  has  elected  to 
avail  itself  of  the  facilities  offered.  As  the  sys- 
tem comes  to  be  more  widely  used,  as  its  mechan- 
ism becomes  perfected,  and  as  the  number  of 
branches  of  federal  reserve  banks  increases,  these 
collection  charges  will  probably  be  reduced.  The 
expense  per  item  of  doing  this  business  already 
seems  to  be  a  declining  one. 

The  new  system  does  not  deny  to  member 
banks  and  clearing  member  banks  the  right  to 
make  a  charge  against  other  banks  (aside  from 
federal  reserve  banks)  and  against  their  own 
customers  for  the  collection  of  out-of-town 
checks  and  drafts  received  over  their  counters. 
It  does  require,  however,  that  these  charges  shall 
be  reasonable,  the  reasonableness  to  be  determ- 
ined by  the  federal  reserve  board,  and  that  in  no 
event  shall  it  exceed  one-tenth  of  one  per  cent. 

Banks  which  formerly  charged  their  custo- 
mers excessive  rates  for  collection  are  according- 
ly being  forced  by  competition  or  by  the  board's 
regulations  to  reduce  their  charges,  while  an  in- 
creasing number  of  banks  appear  to  be  giving  up 
all  collection  charges  on  demand  items.     They 


I 


FEDERAL  RESERVE  SYSTEM  75 

may,  as  a  compensation,  require  customers  to 
carry  larger  balances,  or  they  may  find  the  ex- 
pense a  productive  one  as  an  item  of  advertising. 
Recently  the  collection  service  has  been  ex- 
tended to  items  other  than  checks  such  as  promis- 
sary  notes,  trade  bills,  time  drafts,  and  the  like, 
an  obvious  need  if  the  federal  reserve  banks  are 
to  serve  member  banks  as  adequate  substitutes 
for  the  member  banks'  former  reserve  agents. 
Referring  to  a  cji^cular  on  this  subject  transmit- 
ted by  the  federal  reserve  board  to  all  federal 
reserve  banks,  August  11,  1917,  the  Federal  Re- 
serve Bulletin  says:^  "The  present  plan  con- 
templates that  every  federal  reserve  bank  give 
notice  that  it  will  undertake  the  collection  of  ma- 
turing notes  and  bills  which  are  payable  at  any 
town  or  city  where  the  federal  reserve  bank  has 
satisfactory  arrangements  for  collecting  checks 
through  banks,  and  that  a  similar  notice  be  sent 
to  every  other  federal  reserve  bank  that  such  col- 
lection will  be  made  for  other  federal  reserve 
banks  on  satisfactory  banking  points  in  its  own 
district.  The  banks  are  to  let  it  be  known  that 
these  collections  will  be  made  subject  to  the  usual 
limitations  as  to  liability,  the  actual  cost  of  col- 
lection to  be  deducted  when  the  proceeds  are  ac- 
counted for,  while  for  their  protection  they  may 
exact  a  moderate  service  charge." 

«  Federal  Reserve  Bulletin,  September  1,  1917,  page  656. 


76  THE  A  B  C  OF  THE 

The  Gold  Settlement  Fund 

One  serious  difficulty  of  the  old  collection  sys- 
tem, as  we  have  seen  (pages  22-23) ,  was  the  need 
of  numerous  and  expensive  shipments  of  cur- 
rency back  and  forth  over  the  country  as  the  sea- 
sonal stresses  in  the  trade  demands  for  currency 
shifted  from  one  section  to  another.  The  new 
system  absolutely  eliminates  the  necessity  of  a 
large  proportion  of  these  currency  shipments  and 
both  reduces  the  expense  of  those  shipments 
which  do  take  place  and  lightens  its  burden  by 
distributing  it. 

The  mechanism  by  which  the  necessity  of  a 
large  proportion  of  these  currency  shipments  is 
avoided  is  that  of  the  Gold  Settlement  Fund,  and 
the  separate  but  similar  Federal  Reserve  Agents' 
Fund.  The  gold  settlement  fund,  although 
planned  in  its  essentials  early  in  1914,  was  not 
established  until  June,  1915.  The  order  of  the 
federal  reserve  board  establishing  this  fund^  re- 
quires each  federal  reserve  bank  to  forward  to 
the  treasury  or  the  nearest  sub-treasury  of  the 
United  States  for  credit  to  the  account  of  the 
gold  settlement  fund  $1,000,000  in  gold  or  gold 
certificates,  and  in  addition  an  amount  at  least 
equal  to  its  indebtedness  due  to  all  federal  re- 


7  Regulation  L.  Series  of  1915. 


I 


FEDERAL  RESERVE  SYSTEM  77 

serve  banks.  These  sums  are  made  payable  to 
the  order  of  the  federal  reserve  board..  Each  fed- 
eral reserve  bank  is  required  to  maintain  a  bal- 
ance in  the  fund  of  not  less  than  $1,000,000.  As  a 
matter  of  fact  all  the  banks  carry  balances  very 
many  times  as  large  as  this  minimum.  Credit 
on  the  books  of  the  gold  settlement  fund  is 
counted  as  a  part  of  a  federal  reserve  bank's  legal 
reserve.  The  settlement  of  balances  between 
federal  reserve  banks  is  effected  once  a  week 
through  the  instrumentality  of  telegrams  sent  to 
the  federal  reserve  board,  by  transfers  of  debits 
and  credits  on  the  books  of  the  gold  settlement 
fund. 

A  separate  fund  similarly  constituted  is  the 
Federal  Reserve  Agents'  Fund.  Federal  reserve 
agents,  it  will  be  recalled,  have  large  funds  in 
their  custody,  representing  gold  pledged  with 
them  as  security  for  federal  reserve  notes. 

Through  the  machinery  of  the  gold  settlement 
fund  and  the  federal  reserve  agents'  fund,  trans- 
fers may  be  made  among  all  the  federal  reserve 
banks,  between  any  federal  reserve  bank  and  any 
federal  reserve  agent,  and  between  any  federal 
reserve  bank  or  any  federal  reserve  agent  and  the 
treasury  or  any  sub-treasury  of  the  United 
States. 

The  gold  settlement  fund  system  of  transfers 


78  THE  A  B  C  OF  THE 

has  almost  eliminated  the  necessity  of  shipping- 
money  (other  than  federal  reserve  notes)  be- 
tween federal  reserve  banks.  On  February  21, 
1918,  that  fund  amounted  in  round  numbers  to 
$378  millions,  while  the  federal  reserve  agents' 
fund  amounted  to  $534  millions,  making  a  total 
of  $912  millions.  The  combined  clearings  and 
transfers  for  these  funds  sometimes  amount  to 
over  a  billion  dollars  in  a  week.  These  opera- 
tions involve  very  small  changes  in  the  ownership 
of  gold  in  the  funds,  sometimes  less  than  2  per 
cent  of  their  amount.^ 

The  federal  reserve  clearing  and  collection  sys- 
tem is  therefore  providing  a  means  of  eliminating 
the  evils  of  the  old  system.  Excessive  collection 
charges  are  rapidly  becoming  things  of  the  past. 
Banks  are  enabled  to  dispense  with  the  necessity 
of  tying  up  large  sums  in  scattered  deposits  with 
correspondent  banks  at  low  rates  of  interest  for 
the  purpose  of  securing  for  themselves  adequate 
facilities  for  the  collection  of  checks^  These  de- 
posits can  now  be  brought  home  and  the  funds 
loaned  out  at  much  better  interest  rates.  The 
routing  of  checks  is  being  eliminated  and  the 
"float"  is  being  greatly  reduced,  all  of  which  are 
important  gains  to  the  public.  The  expense  of 
heavy  currency  shipments  is  avoided  and  the 
economies  realized  by  the  new  system  are  an  im- 


FEDERAL  RESERVE  SYSTEM  79 

portant  factor  in  the  forces  that  have  made  pos- 
sible the  recent  great  reduction  in  the  reserve  re- 
quirements of  American  banks,  a  reduction  which 
involves  a  saving  of  many  hundreds  of  millions 
of  dollars. 

Foreign  Exchange    ^r" 

The  federal  reserve  law  has  brought  about  im- 
portant reforms  in  the  matter  of  financing  our 
foreign  trade.  The  rediscount  machinery  cre- 
ated by  our  twelve  federal  reserve  banks  is  doing 
much  toward  developing  an  American  discount 
market.  This  development  is  being  expedited  by 
the  heavy  demands  for  American  funds  on  the 
part  of  foreign  nations,  caused  by  the  war  and 
by  the  disruption  of  foreign  money  markets. 
Much  of  our  foreign  trade  that  was  formerly 
financed  through  letters  of  credit,  under_which, 
bills  expressed  in  sterling  were  drawn,  is  now 
Ibeinp  financed  directly  by  means  of  dollar  ex- 
change, namely,  bills_drawn  on  banks  apd  biisi- 
ness  houses  in  the  United  States  and  payable  in 
dollars.  Banks  are  willing  to  buy  such  paper 
drawn  in  connection  with  our  import  and  export 
trade,  because  there  is  now  a  ready  market  for 
its  sale  and  rediscount — a  market  created  largely 
by  the  federal  reserve  system.  Furthermore, 
bank   acceptances   in   connection   with    foreign 


80  THE  A  B  C  OF  THE 

trade  are  now  legalized  in  the  United  States, 
under  certain  restrictions,  and  importers  may 
now  arrange  with  American  banks  to  have  their 
foreign  exporters  draw  bills  in  dollars  directly 
on  the  importer's  bank  on  the  United  States; 
while  foreign  importers  may  open  credits  in 
American  banks  upon  which  American  export- 
ers may  draw,  the  bills  being  accepted  by  the 
American  bank  and  sold  in  the  American  dis- 
count market. 

Federal  reserve  banks  have  established  agen- 
cies abroad,  in  England  with  the  Bank  of  Eng- 
land, in  France  with  the  Bank  of  France,  in  the 
Philippines  with  the  National  Bank  of  the  Phil- 
ippines, in  Italy  with  the  Bank  of  Italy,  in  Japan 
with  the  Bank  of  Japan,  and  in  Holland  with 
the  Netherlands  Bank.  The  foreign  exchange 
division  created  by  the  federal  reserve  board  in 
December,  1917,  is  rendering  valuable  service  in 
stabilizing  an  exchange  both  with  our  allies  and 
with  neutrals. 

Under  the  provisions  of  the  federal  reserve  act, 
national  banks  with  a  capital  and  surplus  of  a 
million  dollars  or  over  may  be  authorized  under 
certain  restrictions  to  establish  branches  abroad; 
and  a  number  of  such  branches  have  already  been 
established.  National  banks  may  furthermore* 
invest  to  an  amount  not  exceeding  10  per  cent 


I 


FEDERAL  RESERVE  SYSTEM  81 

of  their  capital  and  surplus  in  the  stock  of  banks 
chartered  in  the  United  States  and  principally- 
engaged  in  international  or  foreign  banking  or 
banking  in  American  dependencies,  and  enjoyi- 
ing  the  privilege  of  establishing  branches  abroad. 
In  this  way  a  number  of  banks  have  been  estab- 
lished which  are  owned  either  wholly  or  in  part 
by  groups  of  national  banks,  and  one  of  them 
already  has  48  national  banks  as  stockholders. 

As  a  result  of  war  conditions  and  of  these 
changes  in  our  banking  system,  we  are  now 
financing  directly  an  increasing  proportion  of 
our  foreign  trade,  and  while  this  proportion  may 
decline  after  the  war,  it  will  probably  never  go 
back  to  the  old  pre-war  figures.  As  regards  the 
financing  at  home  of  our  foreign  trade,  the  fed- 
eral reserve  system  was  established  at  the  op- 
portune time.  It  is  proving  to  be  a  great  influ- 
ence in  the  internationalizing  of  American  trade 
and  American  finance. 


%^ 


CHAPTER  IX 

The  Federal  Reserve  System  and  the  Fed- 
eral Treasury 

The  fourth  and  last  of  the  general  defects  of 
the  old  banking  system,  which  were  discussed  in 
the  early  part  of  this  book,  was  the  defective  or- 
ganization of  the  old  system  from  the  standpoint 
of  the  federal  treasury.  How  is  the  federal  re- 
serve system  remedying  this  defect? 

The  provisions  of  the  federal  reserve  act  con-  ! 
cerning  the  deposit  of  government  funds  are  in 
section  15.  They  are:  "The  moneys  held  in  the 
general  fund  of  the  treasury,  except  the  five  per 
centum  fund  for  the  redemption  of  outstanding 
national-bank  notes,  and  the  funds  provided  in 
this  act  for  the  redemption  of  federal  reserve 
notes  may,  upon  the  direction  of  the  Secretary  of 
the  Treasury,  be  deposited  in  federal  reserve 
banks,  which  banks,  when  required  by  the  Secre- 
tary of  the  Treasury,  shall  act  as  fiscal  agents  of 
the  United  States ;  and  the  revenues  of  the  Gov- 
ernment or  any  part  thereof  may  be  deposited  in 


FEDERAL  RESERVE  SYSTEM  83 

such  banks,  and  the  disbursements  may  be  made 
by  checks  drawn  against  such  deposits. 

"No  pubhc  funds  of  the  Phihppine  Islands,  or 
of  the  postal  savings,^  or  any  government  funds, 
shall  be  deposited  in  the  continental  United 
States  in  any  bank  not  belonging  to  the  system 
established  by  this  act  :,^  provided,  however,  that 
nothing  in  this  act  shall  be  construed  to  deny  the 
right  of  the  Secretary  of  the  Treasury  to  use 
member  banks  as  depositories." 

Many  of  the  advocates  of  the  federal  reserve 
system  believed  that  this  section  did  not  go  far 
enough.  They  believed  that  the  practice  of  de- 
positing government  funds  in  thousands  of 
banks  scattered  over  the  country  was  a  vicious 
and  expensive  one,  and  wished  the  new  law  to 
make  the  federal  reserve  banks  the  depositories 
of  practically  all  general  funds,  dispensing  with 
the  use  of  individual  banks  as  depositories  and 
ultimately  with  the  independent  treasury  system. 
It  was  felt  by  many,  however,  that  the  immedi- 
ate adoption  of  such  a  plan  would  be  moving  too 
rapidly  and  that  it  was  undesirable  to  limit  so 
narrowly  the  Secretary  of  the  Treasury,  who  is 

1  The  law  was  later  amended  so  as  to  authorize,  under  certain 
conditions,  the  deposit  of  postal  savings  funds  in  banks  not 
members  of  the  federal  reserve  system.  See  E.  W.  Kemmerer, 
Postal  Savings,  pages   112-116. 

2  But  see  pages  86-87. 


84  THE  A  B  C  OF  THE 

responsible  for  the  safety  of  government  funds. 
The  extent  to  which  the  Secretary  of  the  Treas- 
ury should  keep  general  funds  in  the  federal  re- 
serve banks,  in  member  banks,  and  in  the  sub- 
treasuries  was,  therefore,  left  to  his  discretion. 
There  appears,  however,  to  have  been  a  wide- 
spread belief  that  the  federal  reserve  banks  would 
become  to  an  increasing  extent  the  depositories  of 
federal  funds,  and  that  national  banks  and  the 
sub-treasuries  would,  as  time  went  on,  receive  an 
ever  declining  proportion  of  these  funds.  The 
Secretary  of  the  Treasury  is  a  member  of  the 
federal  reserve  board,  and  there  is  much  to  be 
said  in  favor  of  the  proposition  that  banks  desir- 
ing government  funds  should  present  their  claims 
for  advances  to  their  federal  reserve  bank,  and 
should  receive  such  funds  only  by  the  ordinary 
method  of  rediscount.  This  would  simplify  the 
problem,  remove  from  the  Secretary  of  the  Treas- 
ury the  onerous  task  of  apportioning  funds 
among  thousands  of  individual  banks,  and  dis- 
courage the  banks  from  depending  upon  the  Sec- 
retary of  the  Treasury  as  a  sort  of  grandfather 
for  aid  in  time  of  need.  The  federal  reserve 
bank,  which  is  having  continual  dealings  with  all 
its  member  banks,  would  presumably  be  in  a  bet- 
ter position  to  judge  the  comparative  needs  of 
different  banks  than  would  the  Secretary  of  the 


FEDERAL  RESERVE  SYSTEM  86 

Treasury.  Moreover,  how  could  a  federal  re- 
serve bank  place  adequate  pressure  on  member 
banks  to  conserve  their  strength  in  time  of  need, 
to  advance  discount  rates,  to  contract  loans,  etc., 
if  the  member  banks  could  "go  around"  the  fed- 
eral reserve  bank  and  the  federal  reserve  board 
and  get  funds  directly  from  the  Secretary  of  the 
Treasury? 

For  these  and  other  reasons  it  was  expected 
that  the  Secretary  of  the  Treasury,  in  the  ex- 
ercise of  the  discretion  granted  him  by  the  law, 
would  deposit  his  funds  in  a  large  and  increasing 
degree  in  federal  reserve  banks.  Events  pointed 
clearly  in  this  direction  prior  to  our  entrance  in- 
to the  war.  Governor  Strong  of  the  New  York 
Federal  Reserve  Bank  writes  me:  "The  first  de- 
posit of  government  funds  made  by  the  treasury 
with  the  federal  reserve  banks  was  on  September 
4,  1915,  when  certain  special  deposits  were  made 
in  a  number  of  banks.  Later,  arrangements 
were  made  to  have  the  collectors  of  customs 
and  collectors  of  internal  revenues  in  the  twelve 
federal  reserve  bank  cities  deposit  all  of  their 
funds  in  the  federal  reserve  banks  and  as  a  mat- 
ter of  fact,  for  a  long  period  prior  to  the  pas- 
sage of  the  bond  act  of  April  24,  1917,  which 
altered  the  status  of  public  deposits,  the  federal 
reserve  banks  had  been  receiving  the  principal 


86  THE  A  B  C  OF  THE 

revenues  of  the  Government  outside  of  postal 
funds  and  had  been  paying  a  very  large  propor- 
tion of  government  checks  and  warrants.  The 
limitation  of  this  fiscal  agency  service  in  the  col- 
lection of  revenues  and  payment  of  checks  to  the 
twelve  federal  reserve  bank  cities  was,  of  course, 
due  to  the  inconvenience  of  extending  these  oper- 
ations to  places  where  federal  reserve  banks  had 
not  yet  established  branches.  The  plan  therefore 
of  actively  employing  the  federal  reserve  banks 
as  fiscal  agents  had  been  put  into  operation  some 
time  before  the  first  bond  bill  was  passed  and  was 
an  important  and  very  active  part  of  the  work 
of  the  reserve  banks  almost  immediately  after 
the  arrangement  was  established." 
^  i  The  abnormal  conditions,  however,  created  by 
•  the  European  War  set  up  obstacles  in  the  way  of 
the  Government's  discontinuing  the  use  of  indi- 
vidual banks  as  depositaries  of  government  funds. 
During  the  early  days  of  the  war  the  heavy  de- 
mands for  funds  in  America  to  meet  obligations 
due  abroad  and  the  frenzied  condition  of  the 
money  markets  throughout  the  world  naturally 
prevented  the  inauguration  of  a  policy  of  with- 
drawing government  funds  from  individual 
banks  and  depositing  them  in  the  federal  reserve 
banks.  Later  the  heavy  buying  in  this  country 
by  European  belligerents   discouraged  such   a 


I 


FEDERAL  RESERVE  SYSTEM  87 

policy.  Such  was  not  a  time  for  withdrawing 
large  sums  from  individual  banks.  Finally  our 
own  entrance  into  the  war  and  the  floating  of  our 
huge  Liberty  loans  rendered  a  transfer  of  this 
kind  out  of  the  question.  In  the  interest  of  caus- 
ing a  minimum  of  disturbance  to  the  money 
market  in  the  floating  of  these  loans,  the  Govern- 
ment wisely  adopted  the  policy  of  keeping  the 
funds  widely  scattered  and  to  as  large  an  extent 
as  practicable  in  the  banks  of  the  communities 
where  they  were  received.  The  result  is  that  in 
recent  times  there  have  been  more  government 
funds  in  individual  banks  than  at  any  previous 
period  in  our  history.  The  deposit  of  govern- 
ment funds,  moreover,  is  no  longer  limited  to 
banks  that  are  members  of  the  federal  reserve  sys- 
tem, since  the  law  under  which  all  government 
bonds  and  certificates  of  indebtedness  have  been 
issued  since  we  entered  the  war  provides  for  the 
deposit  of  their  proceeds  in  qualified  national 
banks  and  state  banks  and  trust  companies 
against  certain  approved  collateral.  Numerous 
nonmember  banks  therefore  have  qualified  as 
depositories  in  connection  with  our  Liberty  loans. 
What  will  be  the  Government's  pohcy  in  this 
matter  after  the  abnormal  conditions  arising  from 
the  war  have  passed,  of  course,  it  is  impossible  to 
say  at  this  time. 


88  THE  A  B  C  OF  THE 

As  fiscal  agents  of  the  Government,  the  federal 
reserve  banks  have  rendered  the  nation  services 
of  incalculable  value  since  our  entrance  into  the 
war,  services  in  connection  with  the  issuance  of 
our  large  Liberty  loans  and  our  ad-interim  treas- 
ury notes,  with  a  minimum  disturbance  to  our 
money  markets.  They  have  aided  greatly  in  the 
conservation  of  our  gold  resources,  in  the  regu- 
lation of  our  foreign  exchanges,  and  in  general 
in  the  centralization  and  efficient  utilization  of 
our  financial  energies.  In  this  time  of  great 
emergency  the  federal  reserve  system  has  been  a 
bulwark  to  our  national  finance.  One  shudders 
when  he  thinks  what  might  have  happened  if  the 
war  had  found  us  with  our  former  decentralized 
and  antiquated  banking  system.  Think  of  pour- 
ing the  crisis  of  1914-1918  into  bottles  that  broke 
with  the  crisis  of  1907! 

The  present  war  demands  of  us  in  financial 
matters  the  maximum  of  efficiency.  If  we  are 
to  win  we  must  make  every  dollar  count  to  the 
utmost.  This  means  the  coordination  of  all  parts 
of  our  banking  system.  It  means  integration 
under  a  responsible  central  control,  and  it  means 
administration  with  sole  regard  to  national  wel- 
fare. Upon  this  subject  we  may  conclude  this 
book  with  the  words  of  President  Wilson,  made 
publicOctober  13,  1917: 


FEDERAL  RESERVE  SYSTEM  89 

"It  is  manifestly  imperative  that  there  should 
be  a  complete  mobilization  of  the  banking  re- 
serves of  the  United  States.  All  who  are  famil- 
iar with  financial  operations  must  appreciate  the 
importance  of  developing  to  the  maximum  our 
banking  power  and  of  providing  financial  ma- 
chinery adequate  for  meeting  the  very  great 
financial  requirements  imposed  upon  our  country 
by  reason  of  the  war.  A  vigorous  prosecution 
and  satisfactory  termination  of  the  war  will  de- 
pend in  no  small  degree  upon  the  ability  of  the 
Government  not  only  to  finance  itself,  but  also  to 
aid  the  governments  associated  with  it  in  the 
war,  which  must  be  kept  supplied  with  muni- 
tions, fuel,  food,  and  supplies  of  all  kinds.  The 
banking  problem  involved  is  one  which  concerns 
all  banks  alike.  Its  solution  does  not  depend 
upon  the  national  banks  alone,  nor  upon  the 
state  banks.  The  burden  and  the  privilege  must 
be  shared  by  every  banking  institution  in  the 
country.  .  .  . 

"The  extent  to  which  our  country  can  with- 
stand the  financial  strains  for  which  we  must  be 
prepared  will  depend  very  largely  upon  the 
strength  and  staying  power  of  the  federal  re- 
serve banks.  .  .  . 

"Many  of  the  largest  state  banks  and  trust 
companies  are  now  becoming  members,  realiz- 


90  FEDERAL  RESERVE  SYSTEM 

ing  that  to  win  the  war  we  must  conserve  all 
of  the  physical,  financial,  and  moral  resources 
of  our  country — that  our  finances  must  rest  on 
the  firmest  possible  foundation,  and  that  they 
must  be  adequately  and  completely  conserved  so 
as  to  respond  instantly  to  every  legitimate  de- 
mand. How  can  this  necessary  condition  be 
brought  about  and  be  made  permanently  effec- 
tive better  than  by  the  concentration  of  the  bank- 
ing strength  of  our  country  in  the  federal  re- 
serve system?  .  .  . 

"I  believe  that  cooperation  on  the  part  of 
the  banks  is  a  patriotic  duty  at  this  time,  and  that 
membership  in  the  federal  reserve  system  is  a 
distinct  and  significant  evidence  of  patriotism." 


APPENDIX  A 

COMBINED  BALANCE  SHEET  OF  TWELVE  FED- 
ERAL RESERVE  BANKS,  MARCH  28,  1918, 
AND  BRIEF  EXPLANATIONS  OF  THE 
VARIOUS  ITEMS 

Resources 

Gold  coin  and  certificates  in  vault' $489,948,000 

Gold      settlement      fund — federal      reserve 

board^ 399,568,000 

Gold  with  foreign  agencies'^ 52,500,000 

Total  gold  held  by  banks 942,016,000 

Gold  with  federal  reserve  agent* 852,192,000 

Gold  redemption  fund' 21,496,000 

Total  gold  reserve 1,815,704,000 

Legal  tender  notes,  silver,  etc.® ,.  58,359,000 

Total  reserves    1,874,063,000 

W    ':■ 

¥    Bills  discounted  for  member  banks' 583,228,000 

Bills  bought  in  open  market^ 304,065,000 

Total  bills  on  hand 887,293,000 

U.  S.  Government  long-term  securities®.  .  .  .  58,190,000 

U.  S.  Government  short-term  securities^"..  252,579,000 

All  other  earning  assets" 3,523,000 

Total  earning  assets 1,201,585,000 


92  APPENDIX  A 

Due    from    other    federal    reserve    banks — 

net^2    26,945,000 

Uncollected  items^^ 339,130,000 

Total  deductions  from  gross  deposits 366,075,000 

Five  per  cent  redemption  fund  against  fed- 
eral reserve  bank  notes^* 537,000 

All   other   resources^^ 3,724,000 

Total  resources    3,445,984,000 

Liabilities 

Capital   paid   in^® $74,223,000 

Surplus"     1,134,000 

Government  deposits^^    104,086,000 

Due  to  members — reserve  account^*' 1,499,400,000 

Collection  items-^ 216,897,000 

Other   deposits,   including   foreign   govern- 
ment credits^^ 81,059,000 

Total  gross  deposits 1,901,442,000 

Federal  reserve  notes  in  actual  circulation^^  1,452,838,000 
Federal  reserve  bank  notes   in  circulation, 

net  liability's    7,978,000 

All  other  liabilities'* 8,369,000 

Total  liabilities    3,445,984,000 

1  This  represents  reserve  money  held  in  the  vaults  of  federal 
reserve  banks  against  deposits  and  federal  reserve  notes.  See 
text,  pp.  52,  5S-59;  and  Act,  sec,  16,  par.  3. 

2  This  is  a  gold  fund  held  in  the  United  States  treasury  by  the 
federal  reserve  board,  in  trust  for  the  federal  reserve  banks,  and 
the  money  it  contains  is  transferred  from  one  federal  reserve 
bank  to  another  or  to  or  from  the  treasurer  of  the  United  States 
by  means  of  debits  and  credits  on  books  kept  by  the  federal  re- 
serve board  in  Washington.  Gold  held  in  the  fund  to  the  credit 
of  any  federal  reserve  bank  is  counted  as  lawful  reserve  money 
against  federal  reserve  notes  or  deposits.  See  text,  p.  76;  and 
Act,  sec.  2,  3d,  and  4th  pars,  from  last. 

3  Federal  reserve  banks  have  established  agencies  in  a  number 
of  foreign  countries,  and,  as  a  matter  of  convenience  as  well  as 


APPENDIX  A  93 

to  avoid  shipping  risks  and  expenses,  some  of  the  federal  reserve 
banks  keep  gold  in  the  vaults  of  these  foreign  agencies.  See  text, 
p.  80;  and  Act,  sec.  14,  par.    (e). 

*  This  is  gold  deposited  with  federal  reserve  agents  as  collateral 
for  the  issue  of  federal  reserve  notes.  See  text,  p.  52;  and 
Act,  sec.  16,  pars.  2-7. 

5  The  gold  redemption  fund  here  mentioned  is  a  fund  held  by 
the  treasurer  of  the  United  States  for  the  redemption  of  federal 
reserve  notes  in  gold  on  demand.  It  is  made  up  of  deposits  of 
gold  from  each  federal  reserve  bank.  Each  bank's  deposit  must 
be  sufficient  in  the  judgment  of  the  Secretary  of  the  Treasury  for 
the  redemption  of  such  federal  reserve  notes  of  the  bank  as  are 
likely  to  be  presented  at  the  treasury  for  redemption;  but  in  no 
case  can  the  fund  be  less  than  five  per  cent  of  the  total  amount 
of  notes  issued  less  the  amount  of  gold  held  by  the  federal  re- 
serve agents  as  collateral  security  for  notes.  Gold  in  the  re- 
demption fund  is  counted  as  part  of  the  legal  reserve  required 
against  federal  reserve  notes.  See  text,  pp.  51-52;  and  Act,  sec. 
16,  par.  4. 

6  This  item  covers  all  kinds  of  money  held  by  federal  reserve 
banks  except  gold  coin  and  gold  certificates. 

7  This  represents  advances  made  by  federal  reserve  banks  to 
member  banks.  It  consists  of  short-time  conmiercial  bills,  notes, 
and  bank  acceptances,  which  have  been  rediscounted  for  member 
banks,  and  of  one  to  fifteen  day  loans  made  to  member  banks 
against  their  notes  coUateraled  by  United  States  government  se- 
curities and  by  commercial  paper.  The  Federal  Reserve  Bulle- 
tin of  each  month  gives  an  analysis  of  the  kinds  and  maturities 
of  the  paper  held.  See  text,  pp.  61-63 ;  Act,  sec.  13,  pars.  2-6 ;  and 
Regulation  A  issued  by  the  federal  reserve  board,  June  22,  1917, 
Federal  Reserve  Bulletin,  July  1,  1917,  pp.  539-541. 

8  The  kinds  of  open-market  operations  which  federal  reserve 
banks  may  carry  on  are  described  in  section  14  of  the  Act.  See 
also  text,  pp.  41-4'4;  and  Regulation  B  issued  by  the  federal  re- 
serve board,  June  22,  1917,  Federal  Reserve  Bulletin  July  1,  1917, 
pp.  541-542. 

9  These  are  United  States  government  bonds,  chiefly  Liberty 
bonds,  owned  by  federal  reserve  banks. 

10  These  are  short-time  treasury  certificates  of  indebtedness 
issued  in  anticipation  of  Liberty  bond  issues.  See  Federal  Re- 
serve Bulletin  March  1,  1918,  pp.  153-154. 

11  This  item  usually  consists  largely  of  municipal  warrants. 
I'sThis    item    represents    simply    the    difference    between    the 

amounts  due  to  and  due  from  other  federal  reserve  banks.  If 
all  entries  were  passed  simultaneously  there  would  obviously  be 
no  balance. 

13  These  are  items  in  process  of  collection,  chiefly  under  the 
federal  reserve  clearing  and  collection  system.     See  text,  pp.  19-22. 


94  APPENDIX  A 

;  Act,  sec.  16,  pars.  14-18;  and  Regulation  J  issued  by  fed- 
eral reserve  board,  June  22,  1917,  Federal  Reserve  Bulletin,  July 
1,  1917,  pp.  549-550. 

14  Federal  reserve  bank  notes  are  bond-secured  bank  notes,  is- 
sued by  federal  reserve  banks,  in  place  of  bond-secured  national 
bank  notes  retired.  Up  to  date  the  amount  of  federal  reserve 
bank  notes  issued  has  been  very  small.  (See  note  23  below). 
Except  for  the  fact  that  they  are  issued  by  federal  reserve  banks, 
they  are  essentially  like  national  bank  notes.  As  in  the  case  of 
the  latter,  the  law  requires  that,  for  the  purpose  of  their  re- 
demption in  Washington,  a  live  per  cent  redemption  fund  be 
maintained  by  the  issuing  bank  in  the  United  States  treasury. 
See  text,  p.  51;  Act,  sec.  18,  par.  6;  and  Act  of  June  20,  1874, 
sec.  3. 

15  This  represents  the  net  debit  balance  on  a  variety  of  ac- 
counts, including  profit  and  loss  account,  gross  earnings  account, 
expense  account,  depreciation  account,  suspense  account,  unearned 
discount  account,  and  the  like. 

16  The  law  requires  every  member  bank  to  subscribe  to  stock 
in  the  federal  reserve  bank  of  its  district  to  the  amount  of  six 
per  cent  of  the  member  bank's  paid-in  capital  and  surplus.  One 
half  of  this  subscription  has  already  been  paid  and  the  other 
half  is  subject  to  the  call  of  the  federal  reserve  board.  This 
item  in  the  balance  sheet  accordingly  represents  three  per  cent 
of  the  combined  paid-in  capital  and  surplus  of  all  member  banks. 
See  text,  p.  31;  and  Act,  sec.  2,  par.  3. 

17  The  law  provides  that  member  banks  shall  receive  out  of  the 
earnings  of  their  federal  reserve  bank  an  annual,  six  per  cent, 
cumulative  dividend  on  their  paid-in  capital  stock,  and  that  the 
balance  of  the  net  earnings  shall  be  paid  to  the  United  States 
Government  as  a  franchise  tax,  "except  that  one-half  of  such  net 
earnings  shall  be  paid  into  a  surplus  fund  until  it  shall  amount 
to  forty  per  centum  of  the  paid-in  capital  stock  of  such  bank." 
Act,  sec.  7,  par.  1. 

18  The  law  authorizes  the  Secretary  of  the  Treasury  to  use  fed- 
eral reserve  banks  as  depositaries  of  public  funds,  except  of  cer- 
tain specified  trust  funds.  The  Secretary  began  depositing  pub- 
lic funds  in  federal  reserve  banks  as  early  as  September  4,  1915, 
and  since  that  time  has  continually  and  extensively  employed 
federal  reserve  banks  as  depositaries.  Legal  reserve  require- 
ments do  not  apply  to  deposits,  of  government  funds.  See  text, 
pp.  83-87;  and  Act,  sec.  15;  also  Act  of  April  24,  1917,  sec.  7; 
and  Act  of  September  24,  1917,  sec.  8. 

19  Member  banks  are  required  by  law  to  keep  their  entire  legal 
reserves  on  deposit  in  the  federal  reserve  bank  of  thir  district. 
See  text,  pp.  35-38;  and  Act,  sec.  19, 

20  These  are  liabilities  of  federal  reserve  banks  to  member 
banks  and  clearing-member  banks  arising  out  of  the  federal  re- 


APPENDIX  A  96 

serve  clearing  and  collection  system.  They  represent  balances 
kept  by  these  banks  over  and  above  those  maintained  to  meet 
legal  reserve  requirements — ^balances  kept  for  clearing  and  col- 
lection purposes.  See  text,  pp.  70-74;  and  references  cited  in  note 
13  above. 

21  This  covers  deposit  credits  of  certain  non-member  banks  in 
the  United  States,  of  certain  foreign  banks  of  which  the  federal 
reserve  banks  are  the  American  agencies,  and  of  certain  foreign 
governments.  See  text,  pp.  70,  80;  Act,  sec.  14,  par.  (e);  and 
Regulation  J  issued  by  the  federal  reserve  board  June  22,  1917, 
Federal  Reserve  Bulletin,  July  1,  1917,  pp.  549-550. 

22  This  item  represents  the  total  amount  of  federal  reserve 
notes  issued  to  the  federal  reserve  banks  and  now  outstanding 
(exclusive  of  the  amount  now  held  by  federal  reserve  banks.  See 
text,  pp.  51-57;  and  Act,  sec.  16. 

23  These  are  the  federal  reserve  bank  notes  described  above  in 
note  14.  The  net  liability  represents  the  total  amount  outstand- 
ing less  the  amount  of  cash  deposited  with  the  treasurer  of  the 
United  States  for  the  retirement  of  such  notes.  See  Act  of 
March  4,  1907,  sec.  4  amending  Act  of  July  12,  1882. 

24  This  represents  the  net  credit  balance  on  a  variety  of  mis- 
cellaneous accoimts.  It  includes  the  excess  of  earned  and  un- 
earned discount  and  interest  over  expenses  and  certain  unproduc- 
tive assets.     Compare  note  15  above. 


of    terms. 


APPENDIX  B 


FEDERAL  RESERVE  ACT 

(Approved  Dec.  23,  1913) 
As  amended  Aug.  4  1914.  {S8  Stat,  682;  Chap. 
226);  Aug.  15,  1914  {SB  Stat.,  691;  Chap. 
252);  Mar.  3,  1915  {38  Stat.,  958;  Chap. 
93);  Sept.  7,  1916  (39  Stat.,  752;  Chap. 
461);  June  21, 1917  (40  Stat.,  Chap.  32). 


An  Act  To  provide  for  the  establishment  of 
Federal  reserve  banks,  to  furnish  an  elastic  cur- 
rency, to  afford  means  of  rediscounting  commer- 
cial paper,  to  establish  a  more  effective  super- 
vision of  banking,  in  the  U^ted  States,  and  for 
other  purposes. 

Be  it  enacted  by  the  Senate  and  House  of 
Representatives  of  the  United  States  of  America- 
in  Congress  assembled.  That  the  short  title  of 
this  Act  shall  be  the  "Federal  Reserve  Act." 

Wherever  the  word   "bank"   is   used  in  this 

^Definitions      Act,  the  word  shall  be   held   to  include   State 

bank,  banking  association,  and  trust  company, 

except  where  national  banks  or  Federal  reserve 

banks  are  specifically  referred  to. 

The  terms  "national  bank"  and  "national 
banking  association"  used  in  this  Act  shall  be 
held  to  be  synonymous  and  interchangeable. 
The  term  "member  bank"  shall  be  held  to  mean 
any  national  bank.  State  bank,  or  bank  or  trust 
company  which  has  become  a  member  of  one 
of  the  reserve  banks  created  by  this  Act.  The 
term  "board"  shall  be  held  to  mean  Federal  Re- 


tricts. 


APPENDIX  B  97 

serve  Board;  the  term  "district"  shall  be  held 
to  mean  Federal  reserve  district;  the  term  "re- 
serve bank"  shall  be  held  to  mean  Federal  re- 
serve bank. 

FEDERAL   RESERVE   DISTRICTS 

Sec.  2.  As  soon  as  practicable,  the  Secre- 
tary of  the  Treasury,  the  Secretary  of  Agricul-  Determina- 
ture  and  the  Comptroller  of  the  Currency,  act-  Jjon_  of  Ris- 
ing as  "The  Reserve  Bank  Organization  Com- 
mittee," shall  designate  not  less  than  eight  nor 
more  than  twelve  cities  to  be  known  as  Federal 
reserve  cities,  and  shall  divide  the  continental 
United  States,  excluding  Alaska,  into  districts, 
each  district  to  contain  only  one  of  such  Feder- 
al reserve  cities.  The  determination  of  said  or- 
ganization committee  shall  not  be  subject  to  re- 
view except  by  the  Federal  Reserve  Board 
when  organized:  Provided,  That  the  districts 
shall  be  apportioned  with  due  regard  to  the  con- 
venience and  customary  course  of  business  and 
shall  not  necessarily  be  coterminous  with  any 
State  or  States.  The  districts  thus  created  may 
be  readjusted  and  new  districts  may  from  time 
to  time  be  created  by  the  Federal  Reserve 
Board,  not  to  exceed  twelve  in  all.  Such  dis- 
tricts shall  be  known  as  Federal  reserve  districts 
and  may  be  designated  by  number.  A  majority 
of  the  organization  committee  shall  constitute  a 
quorum  with  authority  to  act. 

Said  organization  committee  shall  be  author- 
ized to  employ  counsel  and  expert  aid,  to  take 
testimony,  to  send  for  persons  and  papers,  to 
administer  oaths,  and  to  make  such  investiga- 
tion as  may  be  deemed  necessary  by  the  said 
committee  in  determining  the  reserve  districts 
and  in  designating  the  cities  within  such  dis- 
tricts where  such  Federal  reserve  banks  shall  be 
severally  located.     The  said  committee  shall  su- 


98 


APPENDIX  B 


pervise  the  organization  in  each  of  the  cities 
designated  of  a  Federal  reserve  bank,  which 
shall  include  in  its  title  the  name  of  the  city 
in  which  it  is  situated,  as  "Federal  Reserve 
Bank  of  Chicago." 

Under   regulations   to   be   prescribed   by   the 

banks  ^  Vequff!  "Organization  committee,  every  national  banking 

.ed  to  join_izE.  association  in  the  United  States  is  hereby  re- 

g~yTnrs"^^_q"^r^^^  and  every  eligible  bank  in  the  United 

Trust      compa-  States  and  every  trust  company  within  the  Dis- 


,fb"join. 


Double  lia; 
bility  of  stock- 
holders. 


trict  of  Columbia,  is  hereby  authorized  to  sig- 
nify in  writing,  within  sixty  days  after  the  pas- 
sage of  this  Act,  its  acceptance  of  the  terms  and 
provisions  hereof.  When  the  organization  com- 
mittee shall  have  designated  the  cities  in  which 
Federal  reserve  banks  are  to  be  organized,  and 
fixed  the  geographical  limits  of  the  Federal  re- 
serve districts,  every  national  bankingassocia- 
tion  within  th^t  distri(;t,<ihall  he  required  within 
thirty  days  after  notice  from  the  organization 
committee,  to  subscribe  to  the  capital  stock  of 
such  Fedexi^y  y^sp^^e^biank]jflL.A-^um  equaTlojix 
per  centum  of  tbp  paid-^ip  capital^tock  and^ur- 
plus  of  such  bank,  qne^sixth  of  ^le  subscription 
to  be  payable  on  calTof  the  organization  commit- 
^'eSeri 


^eTBoard,  one-sixth 


withinlhree  monthsand  _one:§ixth  within  six 
:^gsths[jh£reafter7jndjb^  remainder  of_thesub- 
gcriptionror"any^_pa  besubject 

T:o  calFwhen  deemed"  necessary  J?J^  tJT?  Efideral 
"Reserve  Boardj^Sajd  payments  to  be  in  go\^.,Jix 
_^d~certificatesT 

The  shareholders  of  every  Federal  reserve 
bank  shall  be  held  individually  responsible, 
equally  and  ratably,  and  not  one  for  another,  for 
all  contracts,  debts,  and  engagements  of  such 
bank  to  the  extent  of  the  amount  of  their  sub- 
scriptions to  such  stock  at  the  par  value  thereof 
in  addition  to  the  amount  subscribed,  whether 


APPENDIX  B  99 

such  subscriptions  have  been  paid  up  in  whole 
or  in  part,  under  the  provisions  of  this  Act. 

Any  national  bank  failing  to  signify  its  ac- 
ceptance of  the  terms  of  this  Act  within  the 
sixty  days  aforesaid,  shall  cease  to  act  as  a  re- 
serve agent,  upon  thirty  days'  notice,  to  be  given 
within  the  discretion  of  the  said  organization 
committee  or  of  the  Federal  Reserve  Board. 

Should  any  national  banking  association  in  Nation 
the   United    States    now   organized    fail   within  al.  banks    nnt 

^     1  A  joining        sya- 

one  year  after  the  passage  of  this  Act  to  become  tem  "Torfek 
a  member  bank  or  fail  to  comply  with  any  of  JH!05!l!!5?' 
the  provisions  of  this  Act  applicable  thereto,  all 
of  the  rights,  privileges,  and  franchises  of  such 
association  granted  to  it  under  the  national-bank 
Act,  or  under  the  provisions  of  this  Act,  shall 
be  thereby  forfeited.  Any  noncompliance  with 
or  violation  of  this  Act  shall,  however,  be  de- 
termined and  adjudged  by  any  court  of  the 
United  States  of  competent  jurisdiction  in  a 
suit  brought  for  that  purpose  in  the  district  or 
territory  in  which  such  bank  is  located,  under 
direction  of  the  Federal  Reserve  Board,  by  the 
Comptroller  of  the  Currency  in  his  own  name 
before  the  association  shall  be  declared  dis- 
solved. In  cases  of  such  noncompliance  or  vio- 
lation, other  than  the  failure  to  become  a  mem- 
ber bank  under  the  provisions  of  this  Act,  every  noncompTiLfS 
director  who  participated  in  or  assented  to  the  with  act. 
same  shall  be  held  liable  in  his  personal  or  in- 
dividual capacity  for  all  damages  which  said 
bank,  its  shareholders,  or  any  other  person  shall 
have  sustained  in  consequence  of  such  violation. 

Such  dissolution  shall  not  take  away  or  im- 
pair any  remedy  against  such  corporation,  its 
stockholders  or  officers,  for  any  liability  or  pen- 
alty which  shall  have  been  previously  incurred,  scripdons  ^'t^o 

Should  the  subscriptions  by  banks  to  the  stock  stock  to  be 
of  said  Federal  reserve  banks  or  any  one  or  d"  r°""ertain 
more  of  them  be,  in  the  judgment  of  the  organi-  contingencies. 


100 


APPENDIX  B 


U.  S.  Gov- 
ernment may 
subscribe  for 
stock  if  banks 
and  public  fail 
to  subscribe 
adequately. 


zation  committee,  insufficient  to  provide  the 
amount  of  capital  required  therefor,  then  and  in 
that  event  the  said  organization  committee  may, 
under  conditions  and  regulations  to  be  pre- 
scribed by  it,  offer  to  public  subscription  at  par 
such  an  amount  of  stock  in  said  Federal  reserve 
banks,  or  any  one  or  more  of  them,  as  said  com- 
mittee shall  determine,  subject  to  the  same  con- 
ditions as  to  payment  and  stock  liability  as  pro- 
vided for  member  banks. 

No  individual,  copartnership,  or  corporation 
other  than  a  member  bank  of  its  district  shall  be 
permitted  to  subscribe  for  or  to  hold  at  any  time 
more  than  $25,000  par  value  of  stock  in  any 
Federal  reserve  bank.  Such  stock  shall  be 
known  as  public  stock  and  may  be  transferred 
on  the  books  of  the  Federal  reserve  bank  by  the 
chairman  of  the  board  of  directors  of  such  bank. 

Should  the  total  subscriptions  by  banks  and 
the  public  to  the  stock  of  said  Federal  reserve 
banks,  or  any  one  or  more  of  them,  be,  in  the 
judgment  of  the  organization  committee,  insuffi- 
cient to  provide  the  amount  of  capital  required 
therefor,  then  and  in  that  event  the  said  organi- 
zation committee  shall  allot  to  the  United  States 
such  an  amount  of  said  stock  as  said  committee 
shall  determine.  Said  United  States  stock  shall 
be  paid  for  at  par  out  of  any  money  in  the  Treas- 
ury not  otherwise  appropriated,  and  shall  be 
held  by  the  Secretary  of  the  Treasury  and  dis- 
posed of  for  the  benefit  of  the  United  States  in 
such  manner,  at  such  times,  and  at  such  price, 
not  less  than  par,  as  the  Secretary  of  the  Treas- 
ury shall  determine. 

Stock  not  held  by  member  banks  shall  not  be 
entitled  to  voting  power. 

The  Federal  Reserve  Board  is  hereby  empow- 
ered to  adopt  and  promulgate  rules  and  regula- 
tions governing  the  transfers  of  said  stock. 


APPENDIX  B  101 

No  Federal  reserve  bank  shall  commence 
business  with  a  subscribed  capital  less  than  $4,- 
000,000.  The  organization  of  reserve  districts 
and  Federal  reserve  cities  shall  not  be  construed 
as  changing  the  present  status  of  reserve  cities 
and  central  reserve  cities,  except  in  so  far  as 
this  Act  changes  the  amount  of  reserves  that 
may  be  carried  with  approved  reserve  agents  lo- 
cated therein.  The  organization  committee  shall  Expenses  of 
have  power  to  appoint  such  assistants  and  incur  commitfee?" 
such  expenses  in  carrying  out  the  provisions  of 
this  Act  as  it  shall  deem  necessary,  and  such 
expenses  shall  be  payable  by  the  Treasurer  of 
the  United  States  upon  voucher  approved  by  the 
Secretary  of  the  Treasury,  and  the  sum  of  $100,- 
000,  or  so  much  thereof  as  may  be  necessary^  is 
hereby  appropriated,  out  of  any  moneys  in  the 
Treasury  not  otherwise  appropriated,  for  the 
payment  of  such  expenses.  ' 

BRANCH   OFFICES 

Sec.  3}     The   Federal   Reserve   Board  may 
lAs  amended  by  act  approved  June  2l7~iyi7   (4U 
Stat,  chap.  32). 

permit  or  rpgnirp  gny^ederal  reserve  hank  tq 
establish  branch  banks  within  the  FedprAl  rp- 
'^rve  district  in  whichjt  is  located  or  within  the 
arstrict_M^iiy~Tederal  reserve  bank  which  may 
have  been  suspended.  Such  branches,  subject 
to  such  rules  and  regulations  as  the  Federal  Re- 
serve Board  may  prescribe,  shall  be  operated 
under  the  supervision  of  a  board  of  directors  to 
consist  of  not  more  than  seven  nor  less  than 
three  directors,  of  whom  a  majority  of  one  shall 
be  appointed  by  the  Federal  reserve  bank  of  the 
district,  and  the  remaining  directors  by  the  Fed- 
eral Reserve  Board.  Directors  of  branch  banks 
shall  hold  ojSice  during  the  pleasure  of  the  Fed- 
eral Reserve  Board. 


102 


APPENDIX  B 


Applidations 
for  member- 
ship. 


Certificates 
of  organiza- 
tion. 


FEDERAL  RESERVE  BANKS 

Sec.  4.^     When   the   organization   committee 
2  As  amended  by  act  approved  June  21,  1917   (40 
Stat.,  chap.  32). 

shall  have  established  Federal  reserve  districts 
as  provided  in  section  two  of  this  Act,  a  certifi- 
cate shall  be  filed  with  the  Comptroller  of  the 
Currency  showing  the  geographical  limits  of 
such  districts  and  the  Federal  reserve  city  des- 
ignated in  each  of  such  districts.  The  Comp- 
troller of  the  Currency  shall  thereupon  cause  to 
be  forwarded  to  each  national  bank  located  in 
each  district,  and  to  such  other  banks  declared 
to  be  eligible  by  the  organization  committee 
which  may  apply  therefor,  an  application  blank 
in  form  to  be  approved  by  the  organization  com- 
mittee, which  blank  shall  contain  a  resolution  to 
be  adopted  by  the  board  of  directors  of  each 
bpnk  executing  such  application,  authorizing  a 
subscription  to  the  capital  stock  of  the  Federal 
reserve  bank  organizing  in  that  district  in  ac- 
cordance with  the  provisions  of  this  Act. 

When  the  minimum  amount  of  capital  stock 
prescribed  by  this  Act  for  the  organization  of 
any  Federal  reserve  bank  shall  have  been  sub- 
scribed and  allotted,  the  organization  committee 
shall  designate  any  five  banks  of  those  whose 
applications  have  been  received,  to  execute  a  cer- 
tificate of  organization,  and  thereupon  the  banks 
so  designated  shall,  under  their  seals,  make  an 
organization  certificate  which  shall  specifically 
state  the  name  of  such  Federal  reserve  bank, 
the  territorial  extent  of  the  district  over  which 
the  operations  of  such  Federal  reserve  bank  are 
to  be  carried  on,  the  city  and  State  in  which 
said  bank  is  to  be  located,  the  amount  of  capital 
stock  and  the  number  of  shares  into  which  the 
same  is  divided,  the  name  and  place  of  doing 
business  of  each  bank  executing  such  certificate, 


APPENDIX  B  103 

and  of  all  banks  which  have  subscribed  to  the 
capital  stock  of  such  Federal  reserve  bank  and 
the  number  of  shares  subscribed  by  each,  and 
the  fact  that  the  certificate  is  made  to  enable 
those  banks  executing  same,  and  all  banks  which 
have  subscribed  or  may  thereafter  subscribe  to 
the  capital  stock  of  such  Federal  reserve  bank, 
to  avail  themselves  of  the  advantages  of  this 
Act. 

The  said  organization  certificate  shall  be  ac- 
knowledged before  a  judge  of  some  court  of  rec- 
ord or  notary  public;  and  shall  be,  together 
with  the  acknowledgment  thereof,  authenticated 
by  the  seal  of  such  court,  or  notary,  transmitted 
to  the  Comptroller  of  the  Currency,  who  shall 
file,  record  and  carefully  preserve  the  same  in 
his  office. 

Upon  the  filing  of  such  certificate  with  the  Y'Si7"M^  ' 
Comptroller  of  the  Currency  as  aforesaid,  the  serve  bankl^ 
said  Federal  reserve  bank  shall  become  a  body 
corporate,  and  as  such,  and  in  the  name  desig- 
nated in  such  organization  certificate,  shall  have 
power — 

First.  J^j^ndnpt  and  use  a  corporate  seal. 

Second.  To  have  succession  for  a  period  of 
twenty  -years  from  its  organization  unless  it  is 
sooner  dissolvedibv^n  Act  of  Congress,  or  un- 
less Its  francliise  becomes  forfeited  by  sorngjido- 
TgrgrnffTlawr" 

TKirrJ     "rn  make  ^nntrflftR. 

Fourth.  "To  sue  and  be  sued,  complain  and 
defend,  inany  court  oT  law  or_equity. 

Fifth.  To  appoiiin)y  its  bo^d  of  directors 
such  officer^^and  eniployees_iis-.aJ^  not  othfrwinr 

Jjrovided  for  in  this  ActTtn  rlefinp  fheir  finfiesj 
require  bnTids  n^  \herr\  ^;nd  fiy  the  penalfy  there- 

gSf  and  to  dismiss  at  pleasure  such  officers  or 
employees. 

Sixth.  T"  p^pffffnbe  by  its  board  nf  diref^tgr^ 


104  APPENDIX  B 

by-laws  not  inconsistent  with  law,  regulating  the 
manner  in  which  its  general  business  may  be 
conducted,  and  the  privileges  granted  to  it  by 
law  may  be  exercised  and  enjoyed. 

Seventh.  To  exercise  by  its  board  of  directors, 
nrjinly  frnthnrized  officers  or  agents,  all  powers 
specifically  granted  by'  the^  provisions  of  this 
Act  and  such  incidental  powers  as  shall  be  nec- 
essary to  carry  on  the  business  of  banking  with- 
in the  limitations  prescribed  by  this  Act. 
Federal  re-  Eighth.  Ulpon^depo^^jgith  the  Treasurer  of 
notS  ^*°^  the  United  States  of  any  ^bonds  of  the  United 
States  in  the  mannerjirgYi^^^  ^y  pvigj^^ing  T?»w 
relating  to  natfenaPKanks,  to  recEJre  from  the 


omptroller  of  the_Curreiicy  circulating  notes^in 
"blank,  regTstered'aiid  countersigned  as  provided 
"byTaw,  eqttalin  amount  to_gie^at~value[oTjEe 
l^nnds  so  d^osite'dr"~sii(?b  nntps  to' 1^e  issued 
under  the  same'conditions  and  provisions  of  law 
as  relate  to  the  issue  of  circulating  notes  of  na- 
tional banks  secured  b^  bonds  15f  the  United 
States  bearing  the  circulating  privilege,  except 
that  the  issue  of  sitch  notes  shall  riot  be  limited 
to  the  capital  stock  of  such  Federal  reserve 
bank. 

But  no  Federal  reserve  bank  shall  transact 
any  business  except  such  as  is  incidental  and 
necessarily  preliminary  to*  its  organization  un- 
til it  has  been  authorized  by  the  Comf)troller  of 
the  Currency  to  commen(!fe  business  under  the 
provisions  of  this  Act. 
Duties  of  Every   Federal   reserve   bank   shall   be    con- 

tor"*^  °*  ^"^'  ducted  under  the  supervision  and  control  of  a 
board  of  directors. 

The  board  of  directors  shall  perform  the  du- 
ties usually  appertaining  to  the  office  of  direc- 
tors of  banking  associations  and  all  such  duties 
as  are  prescribed  by  law. 

Said  board  shall  administer  the  affairs  of  said 


directors. 


APPENDIX  B  105 

bank  fairly  and  impartially  and  without  dis- 
crimination in  favor  of  or  against  any  member 
bank  or  banks  and  shall,  subject  to  the  provis- 
ions of  law  and  the  orders  of  the  Federal  Re- 
serve Board,  extend  to  each  member  bank  such 
discounts,  advancements  and  accommodations  as 
may  be  safely  and  reasonably  made  with  due 
regard  for  the  claims  and  demands  of  other 
member  banks. 

Such  board  of  directors  shall  he  splpptpd   as       Constitutix>n 
herPJTif^ftpr    yppnifiprl    ind    shall    f>nTi<;i<st    nf    ninp    of      board     of 

members,  holding  office  for  three  years,  and  di- 
vided into  three  classes.  HpsiprnafpH  ««  rlassQfi 
A^grandC 

Class  A  shall  consist  of  three  members,  who 
shall  be  choseiTBv  and  be  representative  of  the 
stock-holdingbanks. 

jJJass  ij  shall  consist  of  three  members,  who 

"UJl^  t^'m^  "^  thpir  plpptinn   fihaU   he-   a^fivply  pn- 

^aged_in  their  distrirt  in  ^nmpnprpe.  agriculture 
or  some  other  industrial  pvrsiii|.. 

Qass  C,  sh«^^  '"ons^^t  ^f  three  members  who 
shall  Ibedesignated  by  the  Federal  Keserve 
JBoarB—  When  the  necessary  subscriptions  to 
tHecapital  stock  have  been  obtained  for  the  or- 
ganization of  any  Federal  reserve  bank,  the 
Federal  Reserve  Board  shall  appoint  the  class 
C  directors  and  shall  designate  one  of  such  di- 
rectors as  chairman  of  the  board  to  be  selected. 
Pending  the  designation  of  such  chairman,  the 
organization  committee  shall  exercise  the  pow- 
ers and  duties  appertaining  to  the  office  of 
chairman  in  the  organization  of  such  Federal 
reserve  bank. 

No  Senator  or  Representative  in  Congress 
shall  be  a  member  of  the  Federal  Reserve  Board 
or  an  officer  or  a  director  of  a  Federal  reserve 
bank. 

No  director  of  class  B  shall  be  an  officer,  di- 
rector, or  employee  of  any  bank. 


106  APPENDIX  B 

No  director  of  class  C  shall  be  an  officer,  di- 
rector, employee,  or  stockholder  of  any  bank. 

Directors  of  class  A  and  class  B  shall  be 
chosen  in  the  following  manner: 

The  chairman  of  the  board  of  directors  of  the 
Federal  reserve  bank  of  the  district  in  which 
the  bank  is  situated  or,  pending  the  appointment 
Method  of  of  such  chairman,  the  organization  committee 
tors'oTciasrA  shall  classify  the  member  banks  of  the  district 
and  class  B.  Jjj^.q  three  general  groups  or  divisions.  Each 
group  shall  contain  as  nearly  as  may  be  one- 
third  of  the  aggregate  number  of  the  member 
banks  of  the  district  and  shall  consist,  as  nearly 
as  may  be,  of  banks  of  similar  capitalization. 
The  groups  shall  be  designated  by  number  by 
the  chairman. 

At  a  regularly  called  meeting  of  the  board  of 
directors  of  each  member  bank  in  the  district  it 
shall  elect  by  ballot  a  district  reserve  elector 
and  shall  certify  his  name  to  the  chairman  of 
the  board  of  directors  of  the  Federal  reserve 
bank  of  the  district.  The  chairman  shall  make 
lists  of  the  district  reserve  electors  thus  named 
by  banks  in  each  of  the  aforesaid  three  groups 
and  shall  transmit  one  list  to  each  elector  in 
each  group. 

Each  member  bank  shall  be  permitted  to  nom- 
inate to  the  chairman  one  candidate  for  director 
of  class  A  and  one  candidate  for  director  of 
class  B.  The  candidates  so  nominated  shall  be 
listed  by  the  chairman,  indicating  by  whom 
nominated,  and  a  copy  of  said  list  shall,  within 
fifteen  days  after  its  completion,  be  furnished 
by  the  chairman  to  each  elector. 

Every  elector  shall,  within  fifteen  days  after 
the  receipt  of  the  said  list,  certify  to  the  chair- 
man his  first,  second,  and  other  choices  of  a  di- 
rector of  class  A  and  class  B,  respectively,  upon 
a  preferential  ballot,  on  a  form  furnished  by  the 


APPENDIX  B  107 

chairman  of  the  board  of  directors  of  the  Fed- 
eral reserve  bank  of  the  district.  Each  elector 
shall  make  a  cross  opposite  the  name  of  the 
4— GAL.— ABC  FED.  RESERVE— 13182 
first,  second,  and  other  choices  for  a  director  of 
class  A  and  for  a  director  of  class  B,  but  shall 
not  vote  more  than  one  choice  for  any  one  candi- 
date. 

Any  candidate  having  a  majority  of  all  votes 
cast  in  the  column  of  first  choice  shall  be  de- 
clared elected.  If  no  candidate  have  a  majority 
of  all  the  votes  in  the  first  column,  then  there 
shall  be  added  together  the  votes  cast  by  the 
electors  for  such  candidates  in  the  second  column 
and  the  votes  cast  for  the  several  candidates  in 
the  first  column.  If  any  candidate  then  have  a 
majority  of  the  electors  voting,  by  adding  to- 
gether the  first  and  second  choices,  he  shall  be 
declared  elected.  If  no  candidate  have  a  ma- 
jority of  electors  voting  when  the  first  and  sec- 
ond choices  shall  have  been  added,  then  the 
votes  cast  in  the  third  column  for  other  choices 
shall  be  added  together  in  like  manner,  and  the 
candidate  then  having  the  highest  number  of 
votes  shall  be  declared  elected.  An  immediate 
report  of  election  shall  be  declared. 

Class  C  directors  shall  be  appointed  by  the 
Federal  Reserve  Board.  They  shall  have  been  Appointment 
for  at  least  two  years  residents  of  the  district  rectoM.^ 
for  which  they  are  appointed,  one  of  whom  shall 
be  designated  by  said  board  as  chairman  of  the 
board  of  directors  of  the  Federal  reserve  bank 
and  as  "Federal  reserve  agient."  He  shall  be  a 
person  of  tested  banking  experience,  and  in  ad- 
dition to  his  duties  as  chairman  of  the  board  of 
directors  of  the  Federal  reserve  bank  he  shall 
be  required  to  maintain,  under  regulations  to  be 
established  by  the  Federal  Reserve  Board,  a 
local  office  of  said  board  on  the  premises  of  the 


108 


APPENDIX  B 


Federal     re- 
serve agent. 


Assistants  to 
federal  reserve 
agent. 


Compensa- 
tion of  direc- 
tors. 


Federal  reserve  bank.  He  shall  make  regular 
reports  to  the  Federal  Reserve  Board  and  shall 
act  as  its  official  representative  for  the  perform- 
ance of  the  functions  conferred  upon  it  by  this 
act.  He  shall  receive  an  annual  compensation 
to  be  fixed  by  the  Federal  Reserve  Board  and 
paid  monthly  by  the  Federal  reserve  bank  to 
which  he  is  designated.  One  of  the  directors  of 
class  C  shall  be  appointed  by  the  Federal  Re- 
serve Board  as  deputy  chairman  to  exercise  the 
powers  of  the  chairman  of  the  board  when  nec- 
essary. In  case  of  the  absence  of  the  chairman 
and  deputy  chairman,  the  third-class  C  director 
shall  preside  at  meetings  of  the  board. 

Subject  to  the  approval  of  the  Federal  Re- 
serve Board,  the  Federal  reserve  agent  shall  ap- 
point one  or  more  assistants.  Such  assistants, 
who  shall  be  persons  of  tested  banking  exper- 
ience, shall  assist  the  Federal  reserve  agent  in 
the  performance  of  his  duties  and  shall  also 
have  power  to  act  in  his  name  and  stead  during 
his  absence  or  disability.  The  Federal  Reserve 
Board  sh^  require  such  bonds  of  the  assistant 
Federal  ^Werve  agents  as  it  may  deem  neces- 
sary fojPne  protection  of  the  United  States. 
Assistaares  to  the  Federal  reserve  agent  shall  re- 
ceive an  annual  compensation,  to  be  fixed  and 
paid  in  the  same  manner  as  that  of  the  Federal 
reserve  agent. 

Directors  of  Federal  reserve  banks  shall  re- 
ceive, in  addition  to  any  compensation  otherwise 
provided,  a  reasonable  allowance  for  necessary 
expenses  in  attending  meetings  of  their  respec- 
tive boards,  which  amount  shall  be  paid  by  the 
rf^pective  Federal  reserve  banks.  Any  com- 
pensation that  may  be  provided  by  boards  of 
directors  of  Federal  reserve  banks  for  directors, 
ofiicers  or  employees  shall  be  subject  to  the  ap- 
proval of  the  Federal  Reserve  Board. 


APPENDIX  B  109 

The  Reserve  Bank  Organization  Committee 
may,  in  organizing  Federal  reserve  banks,  call 
such  meetings  of  bank  directors  in  the  several 
districts  as  may  be  necessary  to  carry  out  the 
purposes  of  this  Act,  and  may  exercise  the  func- 
tions herein  conferred  upon  the  chairman  of  the 
board  of  directors  of  each  Federal  reserve  bank 
pending  the  complete  organization  of  such  bank. 

At  the  first  meeting  of  the  full  board  of  di- 
rectors of  each  Federal  reserve  bank,  it  shall  be      Terms  of  of- 
the  duty  of  the  directors  of  classes  A,  B,  and  C,  fi"^  oi   direc- 
respectively,  to  designate  one  of  the  members  ^^j 

of  each  class  whose  term  of  office  shall  expire  in  T 

one  year  from  the  first  of  January  nearest  to  * 

date  of  such  meeting,  one  whose  term  of  office 
shall  expire  at  the  end  of  two  years  from  said 
date,  and  one  whose  term  of  office  shall  expire 
at  the  end  of  three  years  from  said  date.  There- 
after every  director  of  a  Federal  reserve  bank 
chosen  as  hereinbefore  provided  shall  hold  office 
for  a  term  of  three  years.  Vacancies  that  may 
occur  in  the  several  classes  of  directors  of  Fed- 
eral reserve  banks  may  be  filled  ii^he  manner 
provided  for  the  original  selectionBf  such  di- 
rectors, such  appointees  to  hold  ot^k  for  the 
unexpired  terms  of  their  predecessors^ 


STOCK  ISSUES ;  INCREASE  AND  DECREASE  OF  CAPITAL 

Sec.  5.     The  capital  stock  of  each  Federal   . 
reserve   bank   shall   be   divided   into   shares   of 
$100_each._    The  outstanding  capital  stock  shall 
be  increased  from  time  to  time  as  member  banks 
iriprpgsp  f]}Mr  capital  stock  and  surplus  or  as. 
additional  banks  become  members,  and  may  be 
decreased_as  membfir  banks  reduce  ^Sieir  cajptal 
stock  or  surplus  or  cease  to  be  members.^  Shares 
of  the  capital  stock  of  Federal  reserve  banks  ^^ 
owned  by  member  banks  shall  not  be  transferred  |B 
or   hypothecated.      When    a   member   bank   in-    ml 


.<" 


110  APPENDIX  B 

creases  its  capital  stock  or  surplus,  it  shall 
thereupon  subscribe  for  an  additional  amount 
of  capital  stock  of  the  Federal  reserve  bank  of 
its  district  equal  to  six  per  centum  of  the  said 
increase,  one-half  of  said  subscription  to  be 
paid  In  the  maniipy  TiprpinV>pfr>3;a-jgHHwi4^f}  for 
Crigiiral'jubscription,  and  one-iihall  _subj  ect  to 
ciair~6Tthe  Federal  Reserve  Board.  A  bank  ap- 
plying'for  stock  in  a  FederaLxeserye  bank  at 
airytime  after  the  orga^nh!aU£n_Jhereof^_must 
subsei-ib^  for"an  Amount  of^the  capital  stock  of 
thr  f  edgrai  reserg^a'nk"  equal  to_six  per  cent- 
um of  the  paid-up  capital  stock  and  surplus  of 
said"  appltcailt  "15ank7  l^gy^^g "tiSeref or  its  par 
value"prus  dne-halFof  one  per  centum  a  month 
fromThe  pertod'oT'tKeTast  dividendi^  When  the 
capltal~sto^ck  of  any  Tederal  reserve  bank  shall 
have  been  increased  either  on  account  of  the  in- 
crease of  capital  stock  of  member  banks  or  on 
account  of  the  increase  in  the  number  of  mem- 
ber banks,  the  board  of  directors  shall  cause  to 
be  executed  a  certificate  to  the  Comptroller  of 
the  Currency  showing  the  increase  in  capital 
stock,  the  amount  paid  in,  and  by  whom  paid. 
When  a  membe'r  bank  reduces  its  capital  stock  it 
shall  surrender  a  proportionate  amount  of  its 
holdings  in  the  capital  of  said  Federal  reserve 
bank,  and  when  a  member  bank  voluntarily 
liquidates  it  shall"  suffenffer  all  of  its  holdings 
af"the  capital  stock  of  said  Federal  reserye„bank 
and  1)6  releasedr  from  its  stock  subscriptioa^n 
previously  caIled".TTn  either  case  the  shares 
surrehdered  shall  be  canceled  and  the  member 
bank  shall  receive  in  payment  therefor,  under 
regulations  to  be  prescribed  by  the  Federal  Re- 
serve Board,  a  sum  equal  to  its  cash-paid  sub- 
scriptions on  the  shares  surrendered  and  one- 
^i-:^  half  of  one  per  centum  a  month  from  the  period 
'^     of  the  last  dividend,  not  to   exceed  the  book 


•5 


APPENDIX  B  111 

value  thereof,  less  any  liability  of  such  member 
bank  to  the  Federal  reserve  bank. 

Sec.  6.  If  any  member^  bank  shall  be  de-  ^f^J^g^^^  *f^" 
clared  insolvent  and  a  receiver  appointed.  Jihere-  case  a  member 
for,  the  stocrHeTdY3MtTn'lSa "ra^r^^  Svenr^™" 

bank  shall  be  canceled,  wTtlidut  imjgairinent  of 
its  liability,  and  alF^sIP^id^subscriptions  on 
said  stock,  with  one^IialFof  ^ne  jger ^entum  per 
month  froml;lie  "period  oFlast  dividend,  not  to 
exceed  the  F6oEj[aIue_  thereo f ,  shall  be  "first  ap- 
plied to  all  debts  of  th£_insolvent.  member  bank 
to  the, FederaJLxeserve^ bank^aod-ihe  balance, 
if  any,  shall  be  paid  to  the  receiver  of  the  in- 
solvent bank.  Whenever  the  capital  stock  of  a 
Federal  reserve  bank  is  reduced,  either  on  ac- 
count of  a  reduction  in  capital  stock  of  any  mem- 
ber bank  or  of  the  liquidation  or  insolvency  of 
such  bank,  the  board  of  directors  shall  cause  to 
be  executed  a  certificate  to  the  Comptroller  of 
the  Currency  showing  such  reduction  of  capital 
stock  and  the  amount  repaid  to  such  bank. 

DIVISION    OF    EARNINGS 

Sec.  7.     After  all  necessary  expenses  _Qf_^      Dividends 

T-i   J        1  "^ — n r — r T"^  ^  and  surplus. 

hederal    r^f^f^jye.    hflT]k    have,    hppn    paid    nr    nrn- 


for,  the  stockholders  shall  be  entitled_t9 

rpppivp  ar^a^nn^^a^   rlivifif^ud  Of  SJX  per  CejjjTim  On,. 

the  paid-in  capital  stock,  which  dividend  shall 
'Be^  cumulative^     After   the    aforesaid    dividend 
claims  have  been  fully  met,  all  the  net  earnings 
shall  be  paid  to  the  United  States  as  a  fran-_ 
chise  tax,  except  that  one-half  of  such  net  earn^  ^ 

Ings  shall  be  paid  into  a  surplus  tund  until  it 
^all  amount  to"  forty  per  centum  of  the  paid-in 
"oapitalstock  ot  such  ban£! 

The  net  earnings  derived  by  the  United  States     ^Disposition 
from  Federal  reserve  banks  shall,  in  the  discre-  ings    accruing 
tion  of  the   Secretary,  be  used  to   supplement  gjament.'  ^^ 
the     gold     reserve    held     against    outstanding 


tion. 


118  APPENDIX  B 

United  States  notes,  or  shall  be  applied  to  the 
reduction  of  the  outstanding  bonded  indebted- 
ness of  the  United  States  under  regulations  to 
be  prescribed  by  the  Secretary  of  the  Treasury. 
Should  a  Federal  reserve  bank  be  dissolved  or 
go  into  liquidation,  any  surplus  remaining,  af- 
ter the  payment  of  all  debts,  dividend  require- 
ments as  hereinbefore  provided,  and  the  par 
value  of  the  stock,  shall  be  paid  to  and  become 
the  property  of  the  United  States  and  shall  be 
similarly  applied. 
Tax  exemp-  Federal  reserve  banks,  including  the  capital 
stock  and  surplus  therein,  and  the  income  de- 
rived therefrom  shall  be  exempt  from  Federal, 
State,  and  local  taxation,  except  taxes  upon  real 
estate. 

Sec.  8.  Section  fifty-one  hundred  and  fifty- 
four.  United  States  Revised  Statutes,  is  hereby 
amended  to  read  as  follows: 

Any  bank  incorporated  by  special  law  of  any 

may  'be  "con-  State  or  of  the  United  states  or  organized  under 

Jierted  mto^na-  ^he  general  laws  of  any  State  or  of  the  United 

States  and  having  an  unimpaired  capital  suffi- 

cient  to  entitle  it  to  become  a  national  banking 

association  under  the  provision^  of  the  existing 

laws~may^"15y~tEe~vote  dfthe  shareholders~own- 

-ing  not  less  than  fifty^one~per  centum  of  the 

capitaTgock^  ijf_;gnc|rjyg|ik~or  banking  assocla- 

"Tion,  with  tiie  approval  of  the^Cqmptrd^r  of 

lile^piifrencv^binco^  a  national  baakr 

ing  association,  with  an^  name  approved  by  the 

Comptroller  ot  tiie  Currenpx: 

Provided,  however,  Thaijsaid  conversion  shall 
not  be  in  contravention  of  the  State  law.  In 
suctrcasethe  articles  of  association  and  organi- 
zation certificate  may  be  executed  by  a  majority 
of  the  directors  of  the  bank  or  banking  institu- 
tion, and  the  certificate  shall  declare  that  the 


State    banks 


APPENDIX  B  113 

owners  of  fifty-one  per  centum  of  the  capital 
stock  have  authorized  the  directors  to  make 
such  certificate  and  to  change  or  convert  the 
bank  or  banking  institution  into  a  national  as- 
sociation. A  majority  of  the  directors,  after 
executing  the  articles  of  association  and  the  or- 
ganization certificate,  shall  have  power  to  exe- 
cute all  other  papers  and  to  do  whatever  may  be 
required  to  make  its  organization  perfect  and 
complete  as  a  national  association.  The  shares 
of  any  such  bank  may  continue  to  be  for  the 
same  amount  each  as  they  were  before  the  con- 
version, and  the  directors  may  continue  to  be  di- 
rectors of  the  association  until  others  are  elected 
or  appointed  in  accordance  with  the  provisions 
of  the  statutes  of  the  United  States.  When  the 
Comptroller  has  given  to  such  bank  or  banking 
association  a  certificate  that  the  provisions  of 
this  Act  have  been  complied  with,  such  bank  or 
banking  association,  and  all  its  stockholders, 
officers,  and  employees,  shall  have  the  same  pow- 
ers and  privileges,  and  shall  be  subject  to  the 
same  duties,  liabilities,  and  regulations,  in  all 
respects,  as  shall  have  been  prescribed  by  the 
Federal  Reserve  Act  and  by  the  national  bank- 
ing Act  for  associations  originally  organized  as 
national  banking  associations. 

STATE    BANKS    AS    MEMBERS 

Sec.  9.^     Any  bank  incorporated  by  special 
1  As  amended  by  act  approved  June  21,  1917   (40 
Stat.,  chap.  32). 

law  of  any  State,  or  organized  under  the  gener- 
al laws  of  any  State  or  of  the  United  States, 
desiring  to  become  a  member  of  the  Federal  Re- 
serT^~System,  may  make  Application"  to  the  Fed- 
eraTTK^serve  Boards,  un3eF"such  rules~and  regu- 
lations as  it  may  p_rescribe,  for  tTie"rTght  tcTVub- 
scribe  to  the  stock  of  the  Federal  re^erve~Bank~ 


114  APPENDIX  B 

organized  within  the  district  in  which  the  ap- 
pl7ing^-hank-T5~ttrcated.  Such  application  shall 
be" for  the  same  amount  ot  stock  that  the  apply- 
ing bank  would  be  required  to  subscribe  to  as  a 
national  bank.  The  Federal  Reserve  Board, 
subject  to  such  conditions  as  it  may  prescribe, 
may  permit  the  applying  bank  to  become  a 
stockholder  of  such  Federal  reserve  bank. 

In  acting  upon  such  applications  the  Federal 
Reserve  Board  shall  consider  the  financial  con- 
dition of  the  applying  bank,  the  general  char- 
acter of  its  management,  and  whether  or  not  the 
corporate  powers  exercised  are  consistent  with 
the  purposes  of  this  act. 

Whenever  the  Federal  Reserve  Board  shall 
permit  the  applying  bank'~ta  become  a  stock- 
Qualifications  holder  in  the  Federal  fesefve^^^B^tl^IiEfi^  dis- 
necessary    for  trict  its  st6clc~subscfiption_^an^J^^^  payable  on 
mem  ers  ip.       caHof  the  federal  Reserve  Bgard^_and_stock 
issued  to  it  yhail  fee  TJeU  sub j  ect  to  the^ovi- 
sibns  of  this  "act. 

Ail  banks  admitted  to  membership  under,  au- 
thority of  this  section  shalljbe  required  to  .com- 
ply with  the  reserve  and  capital_requirements 
of  this  act  and  to  conform  to_  those  provisions 
of  law  imposed  on  national  banks  which  pro- 
hWiOuch  liaiiksf  rom  lending  on  or  purchasing 
tKSr^owir~stbck,  ^dirch-Trelate~^l;hejv^ 
orTSpatlTnent  of  thejf  "cajnt^^  which 

relate  to~  the  payment  of  unearned—dividends. 
Such  banfes^nd  the  officers.  j;gentSj  and  employ- 
^es^thereof  shall  also  be  subject  to  the  pro- 
visions of  and  to  the  penalties  prescribed  by 
section  fifty-two  hundred  and  nine  of  the  Re- 
vised Statutes,  and  shall  be  required  to  make 
reports  of  condition  and  of  the  payment  of  divi- 
dends to  tiie  Federal  reserve  .bank_i)£lwJii^ 
become  a  member.  Not  less  than  three  q|_  such 
reports  shall  be  made  annually  (HncaE_of_^fL 


I 


of  state  banks. 


APPENDIX  B  116 

Federal  reserve  bank  on  dates  to  be  fixed  by  the 
Federal  Reserve  Board.  Failure  to  make  such 
reports  within  ten  days  after  the  date  they  are 
called  for  shall  subject  the  offending  bank  to 
a  penalty  of  $100  a  day  for  each  day  that  il 
fails  to  transmit  such  report;  such  penalty  to  be 
collected  by  the  Federal  reserve  bank  by  suit 
or  otherwise. 

As  a  condition  of  membership  such  banks  shall       Examination 
likewise  be  subject  to  examinations  made  by  di- 
rection  of  the  Federal  Reserve  Board  or  of  the 
Federal  reserve  bank  by  examiners  selected  or 
approved  by  the  Federal  Reserve  Board. 

Whenever  the  directors  of  the  Federal  reserve 
bank  shall  approve  the  examinations  made  by 
the  State  authorities,  such  examinations  and  the 
reports  thereof  may  be  accepted  in  lieu  of  ex- 
aminations made  by  examiners  selected  or  ap- 
proved by  the  Federal  Reserve  Board:  Pro- 
vided, however.  That  when  it  deems  it  neces- 
sary the  board  may  order  special  examinations 
by  examiners  of  its  own  selection  and  shall  in 
all  cases  approve  the  form  of  the  report.  The 
expenses  of  all  examinations,  other  than  those 
made  by  State  authorities,  shall  be  assessed 
against  and  paid  by  the  banks  examined. 

If  at  any  time  it  shall  appear  to  the  Federal 
Reserve  Board  that  a  member  bank  has  failed 
to  comply  with  the  provisions  of  this  section  or 
the  regulations  of  the  Federal  Reserve  Board 
made  pursuant  thereto,  it  shall  be  within  the 
power  of  the  board  after  hearing  to  require 
such  bank  to  surrender  its  stock  in  the  Federal 
reserve  bank  and  to  forfeit  all  rights  and  privi- 
leges of  membership.  The  Federal  Reserve 
Board  may  restore  membership  upon  due  proof 
of  compliance  with  the  conditions  imposed  by 
this  section. 

Any  State  bank  or  trust  company  desiring  to 


116  APPENDIX  B 

from^^member!  withdraw  from  membership  in  a  Federal  reserve 
ship.  bank  may  do  so,  after  six  months'  written  no- 

tice shall  have  been  liled  with  the  Federal  Re- 
serveriBgard7"upon  the  surreiider  and  cancella- 
tion of  all  bflts^hTJidtffgs  of  capital  stock  in  the 
Fedeifarreserve  batik:  Provided,  however.  That 
no  Federal  reserve_bank^shallj  eYcept  under  ex- 
press^  authority  of_the  FederaLReserve  Board, 
cancel  within  the  same  calendar  year  more  than 
twenty-five  per  centum  of  its  capitaT^tock  for 
the  purpose_of^^effectingjrolm]^^ 
durTngnthat  yeai^j  All  such  applications  shall 
be~3^1t  with  m  the  order  in  which  they  are 
filed  with  the  board.  Whenever  a  member  bank 
shall  surrender  its  stock  holdings  in  a  Federal 
reserve  bank,  or  shall  be  ordered  to  do  so  by 
the  Federal  Reserve  Board,  under  authority  of 
law,  all  of  its  rights  and  privileges  as  a  member 
bank  shall  thereupon  cease  and  determine,  and 
after  due  provision  has  been  made  for  any  in- 
debtedness due  or  to  become  due  to  the  Federal 
reserve  bank  it  shall  be  entitled  to  a  refund  of  I 
its  cash  paid  subscription  with  interest  at  the 
rete  of  one-half  of  one  per  centum  per  month 
from  date  of  last  dividend,  if  earned,  the  amount 
refunded  in  no  event  to  exceed  the  book  value 
of  the  stock  at  that  time,  and  shall  likewise  be 
entitled  to  repayment  of  deposits  and  of  any 
other  balance  due  from  the  Federal  reserve  bank. 
No  applying  bank  shall  be  admitted  to  mem- 
bership in  a  Federal  reserve  bank  unless  it  pos- 
sesses a  paid-up,  unimpaired  capital  sufficient 
to  entitle  it  to  become  a  national  banking  asso- 
ciation in  the  place  where  it  is  situated  under 
the  provisions  of  the  national-bank  act. 

Banks  becoming  members  of  the  Federal  Rc' 

Privileges       scrve    System   under    authority   of  this   section 

tk.ns"^*pMng  shall  be  subject  to  the  provisions  of  this  section 

to  state  banks  and  to  thosc  of  this  act  which  relate  specifically 

members.^*""'"''  to  member  banks,  but  shall  not  be  subject  to 


APPENDIX  B  117 

examination  under  the  provisions  of  the  first 
two  paragraphs  of  section  fifty-two  hundred  and 
forty  of  the  Revised  Statutes  as  amended  by 
section  twenty-one  of  this  act.^  Subject  to  the 
provisions  of  this  act  and  to  the  regulations  of 
the  board  made  pursuant  thereto,  any  bank  be- 
coming a  member  of  the  Federal  Reserve  Sys- 
tem shall  retain  its  full  charter  and  statutory 
rights  as  a  State  bank  or  trust  company,  and 
may  continue  to  exercise  all  corporate  powers 
granted  it  by  the  State  in  which  it  was  created, 
and  shall  be  entitled  to  all  privileges  of  mem- 
ber banks:  Provided,  however.  That  no  Federal 
reserve  bank  shall  be  permitted  to  discount  for 
any  State  bank  or  trust  company  notes,  drafts, 
or  bills  of  exchange  of  any  one  borrower  who 
is  liable  for  borrowed  money  to  such  State  bank 
or  trust  company  in  an  amount  greater  than  ten 
per  centum  of  the  capital  and  surplus  of  such 
State  bank  or  trust  company,  but  the  discount 
of  bills  of  exchange  drawn  against  actually  ex- 
isting value  and  the  discount  of  commercial  or 
business  paper  actually  owned  by  the  person  ne- 
gotiating the  same  shall  not  be  considered  as 
borrowed  money  within  the  meaning  of  this  sec- 
tion. The  Federal  reserve  bank,  as  a  condition 
of  the  discount  of  notes,  drafts,  and  bills  of  ex- 
change for  such  State  bank  or  trust  company, 
shall  require  a  certificate  or  guaranty  to  the 
effect  that  the  borrower  is  not  liable  to  such 
bank  in  excess  of  the  amount  provided  by  this 
section,  and  will  not  be  permitted  to  become 
liable  in  excess  of  this  amount  while  such  notes, 
drafts,  or  bills  of  exchange  are  under  discount 
with  the  Federal  reserve  bank. 

It  shall  be  unlawful  for  any  officer,  clerk,  or 
agent  of  any  bank  admitted  to  membership  un- 
der   authority    of    this    section   to    certify    any 

1  Amending  section  21  of  this  act. 


118 


APPENDIX  B 


check  drawn  upon  such  bank  unless  the  person 
or  company  drawing  the  check  has  on  deposit 
therewith  at  the  time  such  check  is  certified  an 
amount  of  money  equal  to  the  amount  specified 
in  such  check.  Any  check  so  certified  by  duly 
authorized  officers  shall  be  a  good  and  valid  ob- 
ligation against  such  bank,  but  the  act  of  any 
such  officer,  clerk,  or  agent  in  violation  of  this 
section  may  subject  such  bank  to  a  forfeiture  of 
its  membership  in  the  Federal  Reserve  System 
upon  hearing  by  the  Federal  Reserve  Board. 


FEDERAL  RESERVE  BOARD 

^Constitution       g^c.   10.     A  Federal  Reserve  Board  is  here- 

of    office    and  bj__£rf fl^^^   ^>^^cli_shail  consist  of  seven  mem- 

orm^mberr      bcrs,  including  thT^cretary  of  the__Tre^usuiy 

and  the  jUomptroiler  of  the  Currency,  who^.aIiall 


)e  members  ex  officio,  and  &»e  members  ap- 
pointed  by  tEe  Jf  resident  of  the  United  States, 
by  and  with  the  advice  and  consent  of  the  Sen- 
ate. In  selecting  the  five  appointive  members 
of  the  Federal  Reserve  Board,  not  more  than 
one  of  whom  shall  be  selected  from  any  one 
Federal  reserve  district,  the  President  shall  have 
due  regard  to  a  fair  representation  of  the  dif- 
ferent commercial,  industrial  and  geographical 
divisions  of  the  country.  The  five  members  of 
the  Federal  Reserve  Board  appointed  by  the 
President  and  confirmed  as  aforesaid  shall  de- 
vote their  entire  time  to  the  business  of  the 
Federal  Reserve  Board  and  shall  each  receive 
an  annual  salary  of  $12,000,  payable  monthly 
together  with  actual  necessary  traveling  expen- 
ses, and  the  Comptroller  of  the  Currency,  as  ex 
officio  member  of  the  Federal  Reserve  Board, 
shall,  in  addition  to  the  salary  now  paid  him  as 
Comptroller  of  the  Currency,  receive  the  sum 
of  $7,000  annually  for  his  services  as  a  member 
of  said  board. 


APPENDIX  B  119 

The  members  of  said  board,  the  Secretary  of 
the  Treasury,  the  Assistant  Secretaries  of  the 
Treasury,  and  the  Comptroller  of  the  Currency 
shall  be  ineligible  during  the  time  they  are  in 
office  and  for  two  years  thereafter  to  hold  any 
office,  position,  or  employment  in  any  member 
bank.  Of  the  five  members  thus  appointed  by 
the  President  at  least  two  shall  be  persons  ex- 
perienced in  banking  or  finance.  One  shall  be 
designated  by  the  President  to  serve  for  two, 
one  for  four,  one  for  six,  one  for  eight,  and 
one  for  ten  years,  and  thereafter  each  member 
so  appointed  shall  serve  for  a  term  of  ten  years 
unless  sooner  removed  for  cause  by  the  Presi- 
dent. Of  the  five  persons  thus  appointed,  one 
shall  be  designated  by  the  President  as  gover- 
nor and  one  as  vice  governor  of  the  Federal  Re- 
serve Board.  The  governor  of  the  Federal  Re- 
serve Board,  subject  to  its  supervision,  shall  be 
the  active  executive  officer.  The  Secretary  of 
the  Treasury  may  assign  offices  in  the  Depart- 
ment of  the  Treasury  for  the  use  of  the  Federal 
Reserve  Board.  Each  member  of  the  Federal 
Reserve  Board  shall  within  fifteen  days  after 
notice  of  appointment  make  and  subscribe  to 
the  oath  of  office. 

The  Federal  Reserve  Board  shall  have  power 
to  levy  semiannually  upon  the  Federal  reserve  serve  banks  "to 
banks,  in  proportion  to  their  capital  stock  and  ^«  assessed  for 

'  Jr      f  r'  _  ^      expenses    of 

surplus,  an  assessment  suincient  to  pay  its  esti-  board. 
mated  expenses  and  the  salaries  of  its  mem- 
bers and  employees  for  the  half  year  succeed- 
ing the  levying  of  such  assessment,  together 
with  any  deficit  carried  forward  from  the  pre- 
ceding half  year. 

The   first   meeting   of    the    Federal    Reserve 
Board  shall  be  held  in  Washington,  District  of 
Columbia,  as  soon  as  may  be  after  the  passage 
of  this  Act,  at  a  date  to  be  fixed  by  the  Reserve        Restrictions 
Bank  Organization  Committee.     The  Secretary  boaS!""  ^"  ° 


1^0 


APPENDIX  B 


Vacancies. 


Annual 
port. 


of  the  Treasury  shall  be  ex-officio  chairman  of 
the  Federal  Reserve  Board.  No  member  of  the 
Federal  Reserve  Board  shall  be  an  officer  or 
director  of  any  bank,  banking  institution,  trust 
company,  or  Federal  reserve  bank  nor  hold 
stock  in  any  bank,  banking  institution,  or  trust 
company;  and  before  entering  upon  his  duties 
as  a  member  of  the  Federal  Reserve  Board  he 
shall  certify  under  oath  to  the  Secretary  of  the 
Treasury  that  he  has  complied  with  this  re- 
quirement. Whenever  a  vacancy  shall  occijrj 
other  than  by  erpiration  of  term,  among  the  five 
members  of  the  Federal  Reserve  Board  ap- 
pointed by  the  President,  as  above  provided,  a 
successor  shall  be  appointed  by  the  President, 
with  the  advice  and  consent  of  the  Senate,  to 
fill  such  vacancy,  and  when  appointed  he  shall 
hold  office  for  the  unexpired  term  of  the  mem- 
ber whose  place  he  is  selected  to  fill. 

The  President  shall  have  power  to  fill  all 
vacancies  that  may  happen  on  the  Federal  Re- 
serve Board  during  the  recess  of  the  Senate,  by 
granting  commissions  which  shall  expire  thirty 
days  after  the  next  session  of  the  Senate  con- 
venes. 

Nothing  in  this  Act  contained  shall  be  con- 
strued as  taking  away  any  powers  heretofore 
vested  by  law  in  the  Secretary  of  the  Treasury 
which  relate  to  the  supervision,  management, 
and  control  of  the  Treasury  Department  and 
bureaus  under  such  department,  and  wherever 
any  power  vested  by  this  Act  in  the  Federal 
Reserve  Board  or  the  Federal  reserve  agent  ap- 
pears to  conflict  with  the  powers  of  the  Secre- 
tary of  the  Treasury,  such  powers  shall  be  ex- 
ercised subject  to  the  supervision  and  control 
of  the  Secretary. 

The  Federal  Reserve  Board  shall  annually 
make    a   full   report   of   its    operations    to    the 


APPENDIX  B  121 

Speaker  of  the  House  of  Representatives,  who 
shall  cause  the  same  to  be  printed  for  the  infor- 
mation of  the  Congress. 

Section  three  hundred  and  twenty-four  of  the      comiptroller 
Revised  Statutes  of  the  United  States  shall  be  of     the     Cur- 
amended  so  as  to  read  as  follows:     There  shall  ^^^^^' 
be  in  the  Department  of  the  Treasury  a  bureau 
charged  with  the  execution  of  all  laws  passed 
by  Congress  relating  to  the  issue  and  regulation 
of  national  currency  secured  by  United  States 
bonds  and  under  the  general  supervision  of  the 
Federal  Reserve  Board,  of  all  Federal  reserve 
notes,  the  chief  officer  of  which  bureau  shall  be 
called  the  Comptroller  of  the  Currency  and  shall 
perform  his  duties  under  the  general  directions 
of  the  Secretary  of  the  Treasury. 

Sec.  11.^     The  Federal  Reserve  Board  shall 
be  authorized  and  empowered: 

(a)  To  examine  at  its  discretion  the  accounts, 

books  and  affairs  of  each  Federal  reserve  bank      Powers     of 
and  of  each  member  bank  and  to  require  such  Federal  Re- 
statements and  reports  as  it  may  deem  neces- 
sary.    The  said  board  shall  publish  once  each 
week  a  statement  showing  the  condition  of  each 
Federal  reserve  bank  and  a  consolidated  state-      To  supervise 
ment  for  all  Federal  reserve  banks.    Such  state-  fc*i-vYtanks.*  ' 
ments  shall  show  in  detail  the  assets  and  lia- 
bilities   of    the    Federal    reserve   banks,    single 
and  combined,  and  shall  furnish  full  informa- 
tion regarding  the  character  of  the  money  held 
as  reserve  and  the  amount,  nature  and  maturi- 
ties of  the  paper  and  other  investments  owned 
or  held  by  Federal  reserve  banks.  _  . 

(b)  To  permit,  or,  on  the  affirmative  vote  of  one  Federal  re- 
at  least  five  members  of  the  Reserve  Board  to  Jedlscount'^  f or 
require  Federal  reserve  banks  to  rediscount  the  another. 

1  As  amended  by  act  approved  Sept.  7,  1916    (39 
Stat,  752,  chap.  461). 


122 


APPENDIX  B 


To  suspend 
reserve  r  e  - 
quirements. 


To  supervise 
issue    of    Fed- 
eral reserve 
notes. 


To  reclassify 
cities  as  re- 
gards reserve 
requirements. 


discounted  paper  of  other  Federal  reserve  banks 
at  rates  of  interest  to  be  fixed  by  the  Federal 
Reserve  Board. 

(c)  To  suspend  for  a  period  not  exceeding 
thirty  days,  and  from  time  to  time  to  renew  such 
suspension  for  periods  not  exceeding  fifteen 
days,  any  reserve  requirements  specified  in  this 
Act:  Provided,  That  it  shall  establish  a  gradu- 
ated tax  upon  the  amounts  by  which  the  reserve 
requirements  of  this  Act  may  be  permitted  to 
fall  below  the  level  hereinafter  specified:  And 
provided  further.  That  when  the  gold  reserve 
held  against  Federal  reserve  notes  falls  below 
forty  per  centum,  the  Federal  Reserve  Board 
shall  establish  a  graduated  tax  of  not  more  than 
one  per  centum  per  annum  upon  such  deficiency 
until  the  reserves  fall  to  thirty-two  and  one- 
half  per  centum,  and  when  said  reserve  falls  be- 
low thirty-two  and  one-half  per  centum,  a  tax 
at  the  rate  increasingly  of  not  less  than  one  and 
one-half  per  centum  per  annum  upon  each  two 
and  one-half  per  centum  or  fraction  thereof  that 
such  reserve  falls  below  thirty-two  and  one-half 
per  centum.  The  tax  shall  be  paid  by  the  re- 
serve bank,  but  the  reserve  bank  shall  add  an 
amount  equal  to  said  tax  to  the  rates  of  interest 
and  discount  fixed  by  the  Federal  Reserve 
Board. 

(d)  To  supervise  and  regulate  through  the 
bureau  under  the  charge  of  the  Comptroller  of 
the  Currency  the  issue  and  retirement  of  Fed- 
eral reserve  notes,  and  to  prescribe  rules  and 
regulations  under  v/hich  such  notes  may  be  de- 
livered by  the  Comptroller  to  the  Federal  re- 
serve agents  applying  therefor. 

(e)  To  add  to  the  number  of  cities  classified 
as  reserve  and  central  reserve  cities  under  ex- 
isting law  in  wj&ich  national  banking  associa- 
tions  are   subject' to   the   reserve   requirements 


Miscellan- 
eous powers. 


APPENDIX  B  123 

set  forth  in  section  t.wenty  of  this  Act;  or  to 
reclassify  existing  reserve  and  central  reserve 
cities  or  to  terminate  their  designation  as  such. 

(f)  To  suspend  or  remove  any  officer  or  di- 
rector of  any  Federal  reserve  bank,  the  cause  of 
such  removal  to  be  forthwith  communicated  in 
writing  by  the  Federal  Reserve  Board  to  the 
removed  officer  or  director  and  to  said  bank. 

(g)  To  require  the  writing  off  of  doubtful 
or  worthless  assets  upon  the  books  and  balance 
sheets  of  Federal  reserve  banks. 

(h)  To  suspend,  for  the  violation  of  any  of 
the  provisions  of  this  Act,  the  operations  of  any 
Federal  reserve  bank,  to  take  possession  thereof, 
administer  the  same  during  the  period  of  sus- 
pension, and,  when  deemed  advisable,  to  liqui- 
date or  reorganize  such  bank. 

(i)  To  require  bonds  of  Federal  reserve 
agents,  to  make  regulations  for  the  safeguard- 
ing of  all  collateral,  bonds.  Federal  reserve 
notes,  money  or  property  of  any  kind  deposited 
in  the  hands  of  such  agents,  and  said  board  shall 
perform  the  duties,  functions,  or  services  speci- 
fied in  this  Act,  and  make  all  rules  and  regula- 
tions necessary  to  enable  said  board  effectively 
to  perform  the  same. 

(j)  To  exercise  general  supervision  over  said 
Federal  reserve  banks. 

(k)  To  grant  by  special  permit  to  national 
banks  applying  therefor,  when  not  in  contraven- 
tion of  State  or  local  law,  the  right  to  act  as 
trustee,  executor,  administrator,  or  registrar  of 
stocks  and  bonds  under  such  rules  and  regula- 
tions as  the  said  board  may  prescribe. 

(1)  To  employ  such  attorneys,  experts,  as- 
sistants, clerks,  or  other  employees  as  may  be 
deemed  necessary  to  conduct  the  business  of  the 
board.  All  salaries  and  fees  shall  be  fixed  in 
advance  by  said  board  and  shall  be  paid  in  the 


1«4  APPENDIX  B 

same  manner  as  the  salaries  of  the  members  of 
said  board.  All  such  attorneys,  experts,  assist- 
ants, clerks,  and  other  employees  shall  be  ap- 
pointed without  regard  to  the  provisions  of  the 
Act  of  January  sixteenth,  eighteen  hundred  and 
eighty-three  (volume  twenty-two.  United  States 
Statutes  at  Large,  page  four  hundred  and 
three),  and  amendments  thereto,  or  any  rule  or 
regulation  made  in  pursuance  thereof:  Provided, 
That  nothing  herein  shall  prevent  the  President 
from  placing  said  employees  in  the  classified 
service. 

(m)  Upon  the  affirmative  vote  of  not  less  than 
five  of  its  members  the  Federal  Reserve  Board 
shall  have  power,  from  time  to  time,  by  general 
ruling,  covering  all  districts  alike,  to  permit 
member  banks  to  carry  in  the  Federal  reserve 
banks  of  their  respective  districts  any  portion 
of  their  reserves  now  required  by  section  nine- 
teen of  this  Act  to  be  held  in  their  own  vaults. 

FEDERAL   ADVISORY    COUNCIL 

How   consti-        Sec.    12.     Therc-Js-Jiereby  created  a  Federal 

A^rf^^nry      r.rt^inrj],      whl>^ — sTiflll      ponsist     pf     ftS 

many  membersas  there  are  Federal  reserve  dis- 
tricts. Each  Federal^ reserve  bank  bv  its  board 
oij\irpo\^nrfi  fihfi]\^nr}}}a}}j  s.elect_from  Jts  ^wn 
Federal  reserve  district  one  member  of  said 
council7~who  shall"  receive  sucir~cbmpensation 
"and  allowances  as  may  be  fixed  by  BisHSoaid  of 
airec^f5_gubj_ectlEo^he  appragal-^f-the- JFeder al 
Reserve  Board.  The  meetings  of  said  advisory 
council  shall  "Be  held  at  Washington,  District  of 
Columbia,  at  least  four  times  each  year,  and 
oftener  if  called  by  the  Federal  Reserve  Board. 
The  council  may  in  addition  to  the  meetings 
above  provided  for  hold  such  other  meetings  in 
Washington,  District  of  Columbia,  or  elsewhere, 
as  it  may  deem  necessary,  may  select  its  own 


tuted 


APPENDIX  B 


1^5 


officers  and  adopt  its  own  methods  of  pro- 
cedure, and  a  majority  of  its  members  shall  con- 
stitute a  quorum  for  the  transaction  of  business. 
Vacancies  in  the  council  shall  be  filled  by  the 
respective  reserve  banks,  and  members  selected 
to  fill  vacancies,  shall  serve  for  the  unexpired 
term. 

The  Federal  Advisory  Council  shall  have 
power,  by  itself  or  through  its  officers,  (1)  to 
confer  directly  with  the  Federal  Reserve  Board 
on  general  business  conditions;  (2)  to  make  oral 
or  written  representations  concerning  matters 
within  the  jurisdiction  of  said  board;  (3)  to 
call  for  information  and  to  make  recommenda- 
tions in  regard  to  discount  rates,  rediscount  busi- 
ness, note  issues,  reserve  conditions  in  the  va- 
rious districts,  the  purchase  and  sale  of  gold  or 
securities  by  reserve  banks,  open-market  opera- 
tions by  said  banks,  and  the  general  affairs  of 
the  reserve  banking  system. 


Powers. 


POWERS   OP    FEDERAL    RESERVE    BANKS 


Sec.  13.^  Any  Federal  reserve  bank  may 
receive  from  any  of  its  member  batiks,  arid  from 
the  United  States,  deposits  ot  current  funds  in 
lawful  money,  national-bank  notes.  Federal  re- 
serve notes,  or  checks,  and  drafts/payable  upon 
presentation,  and  also,  for  collection,  maturing 
notes  and  bills :  or,  solely  for  purposes  of  ex- 


change or  of  collection,  may  receive  from"  other" 
Federal  reserve  banks  deposits  of  current  funds 
in  lawfuTmoney,  national-bank  notes,  or_cb£jcks 
upon  other  Federal  reserve  banks7  and  checks 
and_dratts,  paYabIe"upon  presentation  withinHsL. 
district,  and  maturing  notes  and  bills  payable 
witfim  its  district;  or,  solely  for  the  purposes  of 

1  As  amended  by  act  approved  Mar.  3,  1915  (38 
Stat.,  958  chap.  93)  ;  act  approved  Sept.  7,  1916  (39 
Stat,  752,  chap.  461);  act  approved  June  31,  1917 
('40  Stat.,  chap.  32). 


Deposit. 


126  APPENDIX  B 

exchange  or  of  collection,  may  receive  from  any 
ii<jiimeiiib€F'15ank~or  trust  company  deposits  of 
current~|uiids  in  lawful  mon^^s:.  national-bank 
notes.  Federal  resery£.jiates,  ^ecks  and  drafts 
payable  upon  presentation,  or  maturing  notes 
and  mlis:  Provided,  "Such  nonmember  Fank  or 
trust  company  maintains^  with  the  .b'ecieral  re- 
sigfvenSank  of  its  district  a  "Balance^  sufficient  to 
offset  the  items  in  transit  held  for  its  account  by 
tlie^Jb'ederal  reserve"  bank:  Jt^roxnded  further^ 
That  nothing  iii'thTs"oF  any  other  section  of  this 
Act  sTTairbe  construe3~as  prohibiting  a  member 
or  nonmember  bank  horn  making  reasonable 
cKairgesT^onbe  H^elefmined'Vnd  regulated  lay  the 
F ederst "1^eser"ve"^6arg^~Bur'm  n^  case  to  ex- 
ceed'TO  cents  per  $lQO^or  fraction  thereof,  based 
on  thdotaT  of  checks  and  drafts  presented  at 
any  one  time,  ~for-e^€ction  or  payment  of  checks 
and  drafts  and  remission  therefor  by  exchange 
or  otherwise ;  but  no  such  charges  shall  be  made 
agaiAst  the  FederaTlreserve  banksT  '      " 

Rediscount.  Upon  the  indorsement  of  any  of  its  member 
banks,  which  shall  be  deemed  a  waiver  of  de- 
inand,  notice  and  protest  by  such  bank  as  to  its 
own  m5orsement  exclusively,  any  Federal  re- 
serve bank  may  discount  notes,  drafts,  and  bills 
of_excEan^gearising  out^  of  actual  commercial 
transactions ;  that^s,  notes,  drafts,  and  bills  of 
e'xchange  issued  or  drawn  for  agricultural,  in- 
dustfiat;  or  commercial  purposes,  or  jhe  pro- 
ceeds'of  wliich  ha.v6  been  used, "of  "are  to  be  used, 
for  such"  purposes,  the  Federal3fsPT'YP.  Board 
to  have~The  "fighT  to  determine  or  dje^iie_±Le 
chsracter-oi -the 'paper  thus  eligible  f orjdiscaunt, 
within  the  meaning  of  this  Act.  Nothing  in 
thrs~A.cf  ccmtarrfed"  stoll^^e^ 

such  notes,  drafts,  and  bills  of  exchange^_secured 
by  staple  agricultural  products,  or  other  goods, 
w^es^or  merchandise  fr6m^eing"eligible  for 


APPENDIX  B  in 

such  discount;  but  such  definition  shall  not  in- 
clude hotespdrafts,  or  bills  covering  mer^^'y  in- 
vestments or  issued  or  drawn  for  the  purpose  of 
carrjin^_or_  trading  in  stocks,  bonds,  or  other 
in\j£stment  securities,  except  bonds  and  notes  of 
the  Government  of  the  United  States.  Notes, 
d^ftsT  and  bills  admitted  to  discount  mider  the 
terms  of  this_ j»aragraph  mustTiave  a  jnaturity 
at  the  time  of  discount  of  not  more^  than^mnety 
days,_jgxcHsiverof  daZS__ojL  grace :  Provided, 
That  notes,  drafts,  and  bills  ^rawn  or  issued 
for  agriculturaFpurposes  or  based  on  live  stock 
and  having  a  maturity  not  exceeding  six  montlis, 

exBuSl Ve  jyf  Aaja^nf    graof^j    may    hft  dlsCOUntcd 

in  an  amount  to  be  limited  to  a  percentage  of 

the    assefs^of    the.  ^Fpdpral    refipJrp    hfl"n1c7~Tn~  tip 

ascertained  and_fixed^ J)y^  the  Federal  Reserve 
Beewd. 

The  aggregate  of  such  nflte^,,  drafts,  and  bills 
bearing  the  signature  or  indorsement  of  any  one 
borrower,  whether  a  person,  company,  firm,  or 
corporation,  rediscounted  for  any  one  bank  shall 
at  no  time  exceed  ten  per  cfentum  of  the  unim- 
paired capital  and  surplus  oi  saM  Eankj  But 
this  restriction  shall  not  apply  to  the  discount 
of  bills  of  exchange  drawn  in  good  faith  against 
acluallj^  exi sting -viiTiies.  -c 

Any  Federal  reserve  bank  may  discount  ac- 
jceptancea.- oi  Ihe,  kind^  hereinafter  described , 
which  haye^  a  maturity  at  the  time  of  discount 
of  not  more  than  three  months'  sight,_excliisi3Jfi- 
of  days  of  ^race^  and  which  are  indorsed  by  at 
least  one  member  bank^^ 

Any  member  bank  may  accept  djafts  or  bills 
of  excTiange  dr^wn  upon  it  having  not  more  than  banks^may  ac*- 
six  months'  sight  to  run,  exclusive  of  days  of  c  e  p  t  foreiRn 

T  .   V  .       e   .  ..  .         1    .         and      domestic 

grace,  which  grow  out  oi  transactions  involving  bills. 

the    importation    or    exportation    of    goods;  or 

which  grow  out  of  transactions  involving  the  do- 


128  APPENDIX  B 

mestic  shipment  of  goods  provided  shipping 
doraments~TbnveyTng"  or  securing  title  are  at- 
— tarched^~at  the^Tme'of  accejpFanc^^r  \vhich  are 
secured  at  the  time"  of  acceptance  by  a  ware- 
h<m5e  fe1cHpt~of~ot^er~sucl^ 

or  securing  title  covering^  readily  marketable 
staples^  InV member  bank  shairaccept^jwhetKer 
TnaT foreign  or  domestic  transaction,  for  any  one 
person,  company7  ~firm^,'~X)jr~C07rpGrSiti6n^  to  an 
amount  equal  at  any  time  in  the  "aggregate  to 
more  than  ten  per  centum  of  Its  paid-up  and  un- 
impaired capital  stock  and  surplus,  unless  the 
bank  is  secured  either  by  attached  documents  or 
by  some  other  actual  security  growing  out  of  the 
same  transaction  as  the  acceptance;  and  no  bank 
shall  accept  such  bills  to  an  amount  equal  at  any 
time  in  the  aggregate  to  more  thflrrmTp-haJf  of 
itr'"pai(l-up~a^^  unimpaired_c.api1-al  stock;  and 
surplus^:  Provided,  however.  That  the  Federal 
Iteserve  T^oaf?T7ViTuTf^r  si-f^>[^  grpnpval  regulations 
as  it  may  prescribejt_which  shall  apply  to  all 
banks  alike^egardless  of  the  amount  of  capital 
stock  and  surplus,  may  authorize  any  member 
bank  ^' a'ccept~such;;;bffl5;2l!?rr^^  amounl  no?  ex- 
ceedin^  at  any  time  Jnthe  aggregate  one  hun- 
dred per  Centum  of  its  paid-up  and  unimpaired 
capital  stock  and  surplus:  Provided,  further. 
That  the  aggregate  of  acceptances  growing  out 
of  domestic  transactions  shall  in  no  event  exceed 
Federal    re-  ^^^7  P^^  ccntum  of  such  capital  stock  and  sur- 

serve        banks    plug. 

Sort-tim"  co"  Any  Federal  reserve^bank  may  make  advances 
lateral  notes.  ^^  its  mem5er]]banks  .011^  their  prpmisspry  notes 
fof'^arperiod  not  exceedin^^fteen  days  at  rates 
to~be~eStaBTishe3^"by  such  Federal  reserve. hanks,.. 
•^nbjeeTfo"  the  review  and  determination,  ^ofJthe 
F^^deraT^Eese^F^qard^^rovided  suci^  pxomis- 
soryHtiotes  are  secured  by  such  not^s^jira£t&»-bilIs,. 
of   exchange,    or   bankers'  ^ceptancea .,  as    arfi. 


APPENDIX  B  129 

eligible  for  rediscount  or  for  purchase  by  Fed- 
eral reserve  banks  under  the  provisions  of  this 
Act/ or  hy  the  deposit  or  pTedge~dT"bon3s  or 
notes  oTthe  United  State"3r~  ~~ 

Section  fifty-two  hundred  and  two  of  the  Re^  on^lndlht'S?' 
vised  Statutes  of  the   United  States  is  Hereby  ness  of  nation- 
amended~so~as  to  read  as~tqliows:    "No  iiationaT  ^^     *°  ^' 
banking   association   shall   at   any   timenSe   in- 
debted^r  in  any  way  liable,  to  an  ambunf  ex-^ 
ceeding  the  amount  of  its  capital  sfock  aT  sucIT' 
tinie'~actually  paid  in  and  remaining  undimin- 
ished by  losses  or  otherwise,  except  on  account 
of  demands  of  tEelnature  following:      ;  ~' 

First.     Notes  of  circulation. 

Second.  Moneys  deposited^with  or  collected 
by  the  association. 

Third.  Bills_pf  exchange  or  drafts  drawn 
agfjingf  ino^f^y  artiT?.^y  /^  rlppngit  in  tlip^  credit 
ofjth£_.assDciation^  or  due  thereto. 

Fourth.  Liabilities  to  the  stockholders  of 
the  association  for  dividends  and  reserve  profits. 

Fifih^^LiablUlieH  iiH!Uf]*ed  under  the  provi- 
sions  prtEe  Federal  reserve  Act. 

The  discount  and  rediscount  and  the  purchase 
and  sale  by  any  Federal  reserve  bank  of  any 
bills  receivable  and  of  domestic  and  foreign  bills 
of  exchange,  and  of  acceptances  authorized  by 
this  Act,  shall  be  subject  to  such  restrictions^, 
limitajjoTTR^^arifj  rpgnlfliinns  as  may  be  imposed 
byJEhe  Federal  Reserve  Board. - 

That  in  addition  to  the  powers  now  vested  by_  Additional 
law  in  natijpnaL-banking  associations  organized  .tn^natinnai 
under  tHe  laws  of  the  United  States  any  such  ^^nks. 
association  located  and  doing   business   in  any 
place  the  population  of  which  does  not  exceed  , 
five  thousand  iniiabitants,  as  shown  bv  the  lastT 
precedijqg   decennial   census,   may,   under    such- 
rules  and  regulations  as  may  be  prescribed^ by 
the   CoifTprrnllpr  -iiL.jiie   Currency,   act   aslTthe 


130 


APPENDIX  B 


agent  for  any  fire,  life,  or  other  insurance  com- 
pany~aUlliorized  "ByThe  auiHoHtTes  of  the  State 
in  which  said  bank  is  locate3~To'"do  business  in 
said  S^tate,  T)y~^'sbliciting~and  selling  insurance 
and  collecting  premiums~on  policies  issued  by 
such  c^6mpliiiyjra»irini^y"FeEeIyeI  so 

rendered  such  fees^jor  commissions_as  may  be 
agreed  upon  between  the  sai3~association  and 
the  riisurahce  c6mpany~for  winch  it  may  act_^s 
ageiil;  and  may  als^o  act  as  tjie  broker  or  agent 
for  others  in  making  or  procuring  loans  on  real 
el;ta±e~iucated  withlnon'e  hundred  miles  of  the 
place  in  which  said  bank  may  be  located,  re- 
ceiving for  such  services  a  reasonable  fee  or 
commission:  Provided,  however.  That  no  such 
hank  shall  in  any  case- gnarSjaEeaJSther-Uie- prin- 
cipal or  interest  of  any  sucl^ioans  or  assume  or 
guarantee  the  pay^mentjof  .ajay  pr^^  on  in- 

surance policies  issued  through  its  agency  by 
its  principal:  And  provided  further.  That  the 
bank  shall  not  guarantee  the  truth^f  any  state- 
ment made  by  an  assured  in  filing  Hs  applica- 
tion for  insurance. 

Any  member  bank  may  accept  drafts-QJi-bills 

of  exchange  drawn  upon  it  havingjgatjnitfe-  than 

ized    of    bills  three  montKs^'sight  to  run,  exclusive  of  days  of 

drawn     from    *2 r—i-; -^ 

places  outside  g^ce,  drawn  under  regukLtigns  to^^pxescribed 
Dy~nieTederal  Reserve  Board  by  banks  or  bank- 
ers in  foreign  countries  or  dependenciesjor^m- 
sular  possessions  oT  tlie  UmJeiJ^Bla^^^  the 

purpose  of  furnishing  doflar  exchange  as  re- 
quired by  the  usages  of  trade  in  the  respective 
countries,  dependencies,  or  insular  possessions. 
Such-dra£ts-Qi^^ills  may  be  acquired^  by  Fed- 
eral r^^ve  banks  in  such  amounts^  and  subject 
to  such  regulations,  resfrrctlons,  and  limitations 
as  may  be  prescribed  by  the  Federal  Reserve 
Board:  Provided,  however.  That  no  member 
bank  shall  accept  such  drafts   or   bills   of  ex- 


Acceptances 

by   member 
banks     author 


of  country. 


APPENDIX  B  131 

change  referred  to  this  paragraph  for  any  one 
bank  to  an  amount  exceeding  in  the  aggregate 
ten  per  centum  of  the  paid-up  and  unimpaired 
capital  and  surplus  of  the  accepting  bank  unless 
the  draft  or  bill  of  exchange  is  accompanied  by 
documents  conveying  or  securing  title  or  by 
some  other  adequate  security:  Provided  further. 
That  no  member  bank  shall  accept  such  drafts 
or  bills  in  an  amount  exceeding  at  any  time  the 
aggregate  of  one-half  of  its  paid-up  and  unim- 
paired capital  and  surplus. 

OPEN-MARKET    OPERATIONS 

Sec.  14.^  Any  Federal  reserve  bank  may.  Commercial 
under  rules  and  regulations  prescribed  by  the  Efe^^transfers^ 
Federal  iteserve  ±Soard,  purchase  and  sell  in  the 
open  mai'k^t,  at  home  or  abroad,  either  from  or 
ttrdomestic  or  loreign  banks,  firms,  corpora- 
tions., or  individuals,  cable  transfers  and  bank- 
ers'"acceptances  and  bills  of  exchange  of  the 
kTi^s  and  maturities  by  this  Act  made  eligible 
foF"rediscounty  with  or  without  the  indorsement 
of  a  member  bank.  ~ 

Every  Federal  reserve  bank  shall  have  power^ 

(a)  To  dealinTgold  com  and  bullion  at  home,     Gold    coin 
or    abroad,    to    make    loans    thereon,    exchange  ^^      "  '°°' 
Federal  reserve  notes    for   gold,   gold   coin,   or 

gold  certificates,  and  to  contract  f or  JoaiLa-of 
goTd  coin  or  bullion,  giving  therf fpr,  wfipn  np^- 
essary,  acceptable  security,  including  the  hy- 
pothecation of  United  States  bonds  or  other  se- 
curities which  Federal  reserve  banks  are  author- 
ized  tO-  hold ; 

(b)  To  buy  and  sell,  at  home  or  abroad,  bonds 

and  notes  of  the  United  States,  and  bills,  notes,       Government 
revenue  bonds,  and  warrants   with   a  maturity   securities. 

1  As  amended  by  act  approved  Sept.  7,  1916  (39 
Stat.,  752,  chap.  461);  act  approved  June  21,  1917 
(40  Stat.,  chap.  32). 


132 


APPENDIX  B 


Bills   of   ex- 
change. 


Discount 
rates. 


from  date  of  purchase  of  not  exceeding  six 
months,  issued  in  anticipation  of  the  collection 
of  taxes  or  in  anticipation  of  the  receipt  of  as- 
sured revenues  by  any  State,  county,  district, 
political  subdivision,  or  municipality  in  the  con- 
tinental United  States,  including  irrigation, 
drainage,  and  reclamation  districts,  such  pur- 
chases to  be  made  in  accordance  with  rules  and 
regulations  prescribed  by  the  Federal  Reserve 
Board; 

(c)  To  purchase  from  member  banks  and  to 
sell,  with  or  without  its  indorsement,  bills  of  ex- 
change arising  out  of  commercial  transactions, 
as  hereinbefore  defined; 

(d)  To  establish  from  time  to^time^isubject 
to  review  and  determinat£on^_of3lie-JFederal  Re- 
serve  .boards  rates~or"3iscount  to  be  charged  by 
the  Federal  reserve  bank  for  each  class  of  pa- 
perpvrhtch  sliaH Te"Fxe^~wiffi^^ 
modating  commerce  and  business ;.J- 

(e)  TojestajbBsh  accounts  with  other  Federal 
reserve "banks_for_exchange  purposes  and,  with 
the'consent  or  upon  the  order  and  direction  ojT 
the  "Federal  Reserve  Board  and  nndf.^  rg^rnla- 
tions  to  be  prescribed  by  said  hoards  to  open 
and  maintain  acconnf-s  in  foreign  countries^^- 

agencies    and   point  correspondents,  and  establish  agencies  in 
dents!^"**  such  countries  wheresoever  it  may~T?e  deemed 

best'foFthe  f^v^pos£jii_]^uxsih.s^singj  selling,  and 
coirectrrigT)ills  of  exchange,  and  to  buy  and  sell, 
with  or  without  its  indorsement,  through  such 
correspondents  or  agencies,  bills  of  exchange 
(or  acceptances)  arising  out  of  actual  commer- 
cial transactions  which  have  not  more  than 
ninety  days  to  run,  exclusive  of  days  of  grace, 
and  which  bear  \he  signature  of  two  or  more 
responsible  parties,  and,  with  the  consent  of  the 
Federal  Reserve  Board,  to  open  and  maintain 
banking  accounts  for  such  foreign  correspond- 


Foreign 


APPENDIX  B  133 

ents  or  agencies.  Whenever  any  such  account 
has  been  opened  or  agency  or  correspondent  has 
been  appointed  by  a  Federal  reserve  bank,  with 
the  consent  of  or  under  the  order  and  direction 
of  the  Federal  Reserve  Board,  any  other  Fed- 
eral reserve  bank  may,  with  the  consent  and  ap- 
proval of  the  Federal  Reserve  Board,  be  permit- 
ted to  carry  on  or  conduct,  through  the  Federal 
reserve  bank  opening  such  account  or  appoint- 
ing such  agency  or  correspondent,  any  transac- 
tion authorized  by  this  section  under  rules  and 
regulations  to  be  prescribed  by  the  board. 

GOVERNMENT   DEPOSITS 

Sec.  15.  The  moneys  held  in  the  general 
fund  of  the  Treasury,  except  the  five  per  centum 
fund  for  the  redemption  of  outstanding  national- 
bank  notes  and  the  funds  provided  in  this  Act 
for  the  redemption  of  Federal  reserve  notes  may, 
upon  the  direction  of  the  Secretary  of  the 
Treasury,  be  deposited  in  Federal  reserve  banks, 
which  banks,  when  required  by  the  Secretary  of 
the  Treasury,  shall  act  as  fiscal  agents  of  the 
United  States;  and  the  revenues  of  the  Govern- 
ment or  any  part  thereof  may  be  deposited  in 
such  banks,  and  disbursements  may  be  made  by 
checks  drawn  against  such  deposits. 

No  public  funds  of  the  Philippine  Islands,  or 
of  the  postal  savings,  or  any  Government  funds, 
shall  be  deposited  in  the  continental  United 
States  in  any  bank  not  belonging  to  the  system 
established   by   this    Act:^   Provided,   however, 

1  Section  7  of  the  act  approved  April  34,  1917, 
known  as  "An  act  to  authorize  an  issue  of  bonds  to 
meet  expenditures  for  the  national  security  and  de- 
fense, and,  for  the  purpose  of  assisting  in  the  prose- 
cution of  the  war,  to  extend  credit  to  foreign  gov- 
ernments, and  for  other  purposes,"  authorizes  the 
Secretary  to  deposit  proceeds  of  sale  of  such  bonds  in 
non-member  banks  under  certain  circumstances.  For 
full  text  of  Section  7  see  Appendix,  p. 


134  APPENDIX  B 

That  nothing  in  this  Act  shall  be  construed  to 
deny  the  right  of  the  Secretary  of  the  Treasury 
to  use  member  banks  as  depositories. 

NOTE   ISSUES 
Notes      are 

obligations  of  Sec.  16.^  Federal  reserve  notes,  to  be  is- 
ab'ie  in^  goTd  sued^at  the  discretion  of  the  FederaTReserve 
on  demand.  Board  for  the  purpose  of  making~advances  to 
""^derai  reserve  banks  through  the  Federal  re- 
serve agents  as  hereinafter  set  forth  and  for  no 
other  purpose,  are  hereby  authorized.^  The  said 
notes  shall  be  obligations  of  the  United  States 
and  shall  be  receivable  by  all  national  and  mem- 
ber banks  and  Federal  reserve  banks  and  for  all 
taxes,  customs,  and  other  public  dues.  They 
shall  be  redeemed  in  gold  on  demand  at  the 
Treasury  Department  of  the  United  States,  in 
the  city  of  Washington,  District  of  Columbia,  or 
in  gold  or  lawful  money  at  any  Federal  reserve 
bank. 
Method  and  Any.FederaLxe&erv-e.  bank  may^^nako  applica- 
note ^^ss"^  °^  Jip^  to  the  local^Federal^eserye  agent  for  such 
amount  of  the  jFederal  reserve  notes  hereinbe- 
fPTe^'provIdeSr  for  as~Tr may  require.^  Such  ap- 
plication shall  be  accompanied  with  a  tender 
to  the  local  Federal  reserve  agent  of  collateral 
in  amount  equal  to  the  sum  of  the  Federal  re- 
serve notes  thus  applied  for  and  issued  pursuant 
to  such  application.  The  collateral  security 
thus  offered  shall  be  notes,  drafts,  bills  of  ex- 
change, or  acceptances  acquired  under  the  pro- 
visions of  section  thirteen  of  this  Act,  or  bills  of 
exchange  indorsed  by  a  member  bank  of  any 
Federal  reserve  district  and  purchased  under 
the  provisions  of  section  fourteen  of  this  Act, 
or   bankers'    acceptances    purchased   under   the 

2  As  amended  by  act  approved  Sept.  7,  1916  (39 
Stat.,  752,  chap.  461);  act  approved  June  21,  1917 
(40  Stat,  chap.  33). 


APPENDIX  B  135 

provisions  of  said  section  fourteen,  or  gold  or 
gold  certificates;  but  in  no  event  shall  such  col- 
lateral security,  whether  gold,  gold  certificates, 
or  eligible  paper,  be  less  than  the  amount  of 
Federal  reserve  notes  applied  for.  The  Federal 
reserve  agent  shall  each  day  notify  the  Federal 
Reserve  Board  of  all  issues  and  withdrawals  of 
Federal  reserve  notes  to  and  by  the  Federal  re- 
serve bank  to  which  he  is  accredited.  The  said 
Federal  Reserve  Board  may  at  any  time  call 
upon  a  Federal  reserve  bank  for  additional  se- 
curity to  protect  the  Federal  reserve  notes  is- 
sued to  it. 

Every   Federal   reserve   bank   shall  maintain 
reserves  in  gold  or  lawful  money  of  not  less  than      Reserve    re- 
thirty-five  per  centum  against  its  deposits  and  federal  reserve 
reserves  in  gold  of  not  less  than  forty  per  centum  banks,  and  re- 

»  .      ^  ,       .        demption    of 

against  its  Jt^ederal  reserve  notes  m  actual  cir-  notes, 
culation:  Provided,  however.  That  when  the 
Federal  reserve  agent  holds  gold  or  gold  certifi- 
cates as  collateral  for  Federal  reserve  notes  is- 
sued to  the  bank  such  gold  or  gold  certificates 
shall  be  counted  as  part  of  the  gold  reserve 
which  such  bank  is  required  to  maintain  against 
its  Federal  reserve  notes  in  actual  circulation. 
Notes  so  paid  out  shall  bear  upon  their  faces  a 
distinctive  letter  and  serial  number  which  shall 
be  assigned  by  the  Federal  Reserve  Board  to 
each  Federal  reserve  bank.  Whenever  Federal 
reserve  notes  issued  through  one  Federal  re- 
serve bank  shall  be  received  by  another  Federal 
reserve  bank,  they  shall  be  promptly  returned 
for  credit  or  redemption  to  the  Federal  reserve 
bank  through  which  they  were  originally  issued 
or,  upon  direction  of  such  Federal  reserve  bank, 
they  shall  be  forwarded  direct  to  the  Treasurer 
of  the  United  States  to  be  retired.  No  Federal 
reserve  bank  shall  pay  out  notes  issued  through 
another  under  penalty  of  a  tax  of  ten  per  centum 


136  APPENDIX  B 

upon  the  face  value  of  notes  so  paid  out.  Notes 
presented  for  redemption  at  the  Treasury  of  the 
United  States  shall  be  paid  out  of  the  redemp- 
tion fund  and  returned  to  the  Federal  reserve 
banks  through  which  they  were  originally  is- 
sued, and  thereupon  such  Federal  reserve  bank 
shall,  upon  demand  of  the  Secretary  of  the 
Treasury,  reimburse  such  redemption  fund  in 
lawful  money  or,  if  such  Federal  reserve  notes 
have  been  redeemed  by  the  Treasurer  in  gold  or 
gold  certificates,  then  such  funds  shall  be  reim- 
bursed to  the  extent  deemed  necessary  by  the 
Secretary  of  the  Treasury  in  gold  or  gold  cer- 
tificates, and  such  Federal  reserve  bank  shall, 
so  long  as  any  of  its  Federal  reserve  notes  re- 
main outstanding,  maintain  with  the  Treasurer 
in  gold  an  amount  sufficient  in  the  judgment  of 
the  Secretary  to  provide  for  all  redemptions  to 
be  made  by  the  Treasurer.  Federal  reserve 
notes  received  by  the  Treasurer  otherwise  than 
for  redemption  may  be  exchanged  for  gold  out 
of  the  redemption  fund  hereinafter  provided  and 
returned  to  the  reserve  bank  through  which  they 
were  originally  issued,  or  they  may  be  returned 
to  such  bank  for  the  credit  of  the  United  States. 
Federal  reserve  notes  unfit  for  circulation  shall 
be  returned  by  the  Federal  reserve  agents  to  the 
Comptroller  of  the  Currency  for  cancellation 
and  destruction. 

The  Federal  Reserve  Board  shall  require  each 
Federal  reserve  bank  to  maintain  on  deposit  in 
the  Treasury  of  the  United  States  a  sum  in  gold 
sufficient  in  the  judgment  of  the  Secretary  of 
the  Treasury  for  the  redemption  of  the  Federal 
reserve  notes  issued  to  such  bank,  but  in  no 
event  less  than  five  per  centum  of  the  total 
amount  of  notes  issued  less  the  amount  of  gold 
or  gold  certificates  held  by  the  Federal  reserve 
agent  as  collateral  security;  but  such  deposit  of 


APPENDIX  B  137 

gold  shall  be  counted  and  included  as  part  of 
the  forty  per  centum  reserve  hereinbefore  re- 
quired. The  board  shall  have  the  right,  acting 
through  the  Federal  reserve  agent,  to  grant  in 
whole  or  in  part  or  to  reject  entirely  the  appli- 
cation of  any  Federal  reserve  bank  for  Federal 
reserve  notes ;  but  to  the  extent  that  such  appli- 
cation may  be  granted  the  Federal  Reserve 
Board  shall,  through  its  local  Federal  reserve 
agent,  supply  Federal  reserve  notes  to  the  banks 
so  applying,  and  such  bank  shall  be  charged 
with  the  amount  of  notes  issued  to  it  and  shall 
pay  such  rate  of  interest  as  may  be  established 
by  the  Federal  Reserve  Board  on  only  that 
amount  of  such  notes  which  equals  the  total 
amount  of  its  outstanding  Federal  reserve  notes 
less  the  amount  of  gold  or  gold  certificates  held 
by  the  Federal  reserve  agent  as  collateral  se- 
curity. Federal  reserve  notes  issued  to  any  such 
bank  shall,  upon  delivery,  together  with  such 
notes  of  such  Federal  reserve  bank  as  may  be 
Issued  under  section  eighteen  of  this  act  upon 
security  of  United  States  two  per  centum  Gov- 
ernment bonds,  become  a  first  and  paramount 
lien  on  all  the  assets  of  such  bank. 

Any  Federal  reserve  bank  may  at  any  time  lawful    money 
reduce  its  liability  for  outstanding  Federal  re-  on  deposit 
serve  notes  by  depositing  with  the  Federal  re-  reserve   agent, 
serve  agent  its  Federal  reserve  notes,  gold,  gold 
certificates,    or    lawful    money    of    the    United 
States.    Federal  reserve  notes  so  deposited  shall 
not  be  reissued,  except  upon  compliance  with  the 
conditions  of  an  original  issue.  s  h   •     ' 

The   Federal   reserve   agent   shall  hold   such  of  collateral 
gold,  gold  certificates,  or  lawful  money  available  ^eggrve^^agent 
exclusively    for    exchange    for   the    outstanding 
Federal  reserve  notes  when  offered  by  the  re- 
serve bank  of  which  he  is  a  director.     Upon  the 
request  of  the  Secretary  of  the  Treasury  the 


138 


APPENDIX  B 


Federal  Reserve  Board  shall  require  the  Federal 
reserve  agent  to  transmit  to  the  Treasurer  of  the 
United  States  so  much  of  the  gold  held  by  him 
as  collateral  security  for  Federal  reserve  notes 
as  may  be  required  for  the  exclusive  purpose  of 
the  redemption  of  such  Federal  reserve  notes, 
but  such  gold  when  deposited  with  the  Treasurer 
shall  be  counted  and  considered  as  if  collateral 
security  on  deposit  with  the  Federal  reserve 
agent. 

Any  Federal  reserve  bank  may  at  its  discre- 
tion withdraw  collateral  deposited  with  the  local 
Federal  reserve  agent  for  the  protection  of  its 
Federal  reserve  notes  issued  to  it  and  shall  at 
the  same  time  substitute  therefor  other  collateral 
of  equal  amount  with  the  approval  of  the  Fed- 
eral reserve  agent  under  regulations  to  be  pre- 
scribed by  the  Federal  Reserve  Board.  Any 
t  ?S*^'^^*"^"*  Federal  reserve  bank  may  retire  any  of  its  Fed- 

oi    federal    re-  t         -,  .  .  ■, 

era!  reserve  notes  by  depositing  them  with  the 
Federal  reserve  agent  or  with  the  Treasurer  of 
the  United  States,  and  such  Federal  reserve 
jbank  shall  thereupon  be  entitled  to  receive  back 
the  collateral  deposited  with  the  Federal  reserve 
agent  for  the  security  of  such  notes.  Federal 
reserve  banks  shall  not  be  required  to  maintain 
the  reserve  or  the  redemption  fund  heretofore 
provided  for  against  Federal  reserve  notes  which 
have  been  retired.  Federal  reserve  notes  so  de- 
posited shall  not  be  reissued  except  upon  com- 
pliance with  the  conditions  of  an  original  issue. 
All  Federal  reserve  notes  and  all  gold,  gold 
fundr"deposit-  certificates,  and  lawful  money  issued  to  or  de- 
af r^sSv?*^^'^  posited  with  any  Federal  reserve  agent  under 
the  provisions  of  the  Federal  reserve  act  shall 
hereafter  be  held  for  such  agent,  under  such 
rules  and  regulations  as  the  Federal  Reserve 
Board  may  prescribe,  in  the  joint  custody  of 
himself  and  the  Federal  reserve  bank  to  which 


serve   notes. 


Custody     o  f 


agent. 


APPENDIX  B  139 

he  is  accredited.  Such  agent  and  such  Federal 
reserve  bank  shall  be  jointly  liable  for  the  safe- 
keeping of  such  Federal  reserve  notes,  gold, 
gold  certificates,  and  lawful  money.  Nothing 
herein  contained,  however,  shall  be  construed  to 
prohibit  a  Federal  reserve  agent  from  deposit- 
ing gold  or  gold  certificates  with  the  Federal 
Reserve  Board,  to  be  held  by  such  board  sub- 
ject to  his  order,  or  with  the  Treasurer  of  the 
United  States  for  the  purposes  authorized  by 
law. 

In  order  to  furnish  suitable  notes  for  circu- 
lation as  Federal  reserve  notes,  the  Comptroller   character*  and 
of  the  Currency  shall,  under  the  direction  of  the  denominations 
Secretary  of  the  Treasury,  cause  plates  and  dies  serve  notes. 
to   be   engraved   in  the   best  manner   to  guard 
against  counterfeits  and  fraudulent  alterations, 
and  shall  have  printed  therefrom  and  numbered 
such  quantities  of  such  notes  of  the  denomina- 
tions of  $5,  $10,  $20,  $50,  $100,  as  may  be  re- 
quired  to    supply    the    Federal    reserve   banks. 
Such  notes  shall  be  in  form  and  tenor  as  di- 
rected by  the  Secretary  of  the  Treasury  under 
the  provisions   of  this  Act  and  shall  bear  the 
distinctive  numbers  of  the  several  Federal  re- 
serve banks  through  which  they  are  issued. 

When  such  notes  have  been  prepared,  they 
shall  be  deposited  in  the  Treasury,  or  in  the 
subtreasury  or  mint  of  the  United  States  near- 
est the  place  of  business  of  each  Federal  re- 
serve bank  and  shall  be  held  for  the  use  of 
such  bank  subject  to  the  order  of  the  Comp- 
troller of  the  Currency  for  their  delivery,  as 
provided  by  this  Act. 

The  plates  and  dies  to  be  procured  by  the 
Comptroller  of  the  Currency  for  the  printing  of 
such  circulating  notes  shall  remain  under  his 
control  and  direction,  and  the  expenses  neces- 
sarily incurred  in  executing  the  laws  relating  to 


140  APPENDIX  B 

the  procuring  of  such  notes,  and  all  other  ex- 
penses incidental  to  their  issue  and  retirement, 
shall  be  paid  by  the  Federal  reserve  banks,  and 
the  Federal  Reserve  Board  shall  include  in  its 
estimate  of  expenses  levied  against  the  Federal 
reserve  banks  a  sufficient  amount  to  cover  the 
expenses  herein  provided  for. 

The  examination  of  plates,  dies,  bed  pieces, 
and  so  forth,  and  regulations  relating  to  such 
examination  of  plates,  dies,  and  so  forth,  of 
national-bank  notes  provided  for  in  section  fifty- 
one  hundred  and  seventy-four.  Revised  Statutes, 
is  hereby  extended  to  include  notes  herein  pro- 
vided for. 

Any  appropriation  heretofore  made  out  of  the 
general  funds  of  the  Treasury  for  engraving 
plates  and  dies,  the  purchase  of  distinctive  pa- 
per, or  to  cover  any  other  expense  in  connec- 
tion with  the  printing  of  national-bank  notes  or 
notes  provided  for  by  the  Act  of  May  thirtieth, 
nineteen  hundred  and  eight,  and  any  distinctive 
paper  that  may  be  on  hand  at  the  time  of  the 
passage  of  this  Act  may  be  used  in  the  discre- 
tion of  the  Secretary  for  the  purposes  of  this 
Act,  and  should  the  appropriations  heretofore 
made  be  insufficient  to  meet  the  requirements  of 
this  Act  in  addition  to  circulating  notes  pro- 
vided for  by  existing  law,  the  Secretary  is  here- 
by authorized  to  use  so  much  of  any  funds  in 
the  Treasury  not  otherwise  appropriated  for  the 
purpose  of  furnishing  the  notes  aforesaid:  Pro- 
vided, however.  That  nothing  in  this  section  con- 
tained shall  be  construed  as  exempting  national 
banks  or  Federal  reserve  banks  from  their  lia- 
bility to  reimburse  the  United  States  for  any 
expenses  incurred  in  printing  and  issuing  circu- 
lating notes. 

Every  Federal  reserve  bank  shall  receive  on 


APPENDIX  B  141 

deposit  at  par  from  member  banks  or  from  Fed-  ^J^illtion^  sy^ 
eral  reserve  banks  checks  and  drafts  drawn  upon  tem. 
any  of  its  depositors,  and  when  remitted  by  a 
Federal  reserve  bank,  checks  and  drafts  drawn 
by  any  depositor  in  any  other  Federal  reserve 
bank  or  member  bank  upon  funds  to  the  credit 
of  said  depositor  in  said  reserve  bank  or  mem- 
ber bank.  Nothing  herein  contained  shall  be 
construed  as  prohibiting  a  member  bank  from 
charging  its  actual  expense  incurred  in  collect- 
ing and  remitting  funds,  or  for  exchange  sold 
to  its  patrons.  The  Federal  Reserve  Board 
shall,  by  rule,  fix  the  charges  to  be  collected  by 
the  member  banks  from  its  patrons  whose  checks 
are  cleared  through  the  Federal  reserve  bank 
and  the  charge  which  may  be  imposed  for  the 
service  of  clearing  or  collection  rendered  by  the 
Federal  reserve  bank. 

The  Federal  Reserve  Board  shall  make  and 
promulgate  from  time  to  time  regulations  gov- 
erning the  transfer  of  funds  and  charges  there- 
for among  Federal  reserve  banks  and  their 
branches,  and  may  at  its  discretion  exercise  the 
functions  of  a  clearing  house  for  such  Federal 
reserve  banks,  or  may  designate  a  Federal  re- 
serve bank  to  exercise  such  functions,  and  may 
also  require  each  such  bank  to  exercise  the  func- 
tions of  a  clearing  house  for  its  member  banks. 

That  the  Secretary  of  the  Treasury  is  hereby  Gold  settl* 
authorized  and  directed  to  receive  deposits  of  "*^°*  ^""*** 
gold  coin  or  of  gold  certificates  with  the  Treas- 
urer or  an  assistant  treasurer  of  the  United 
States  when  tendered  by  any  Federal  reserve 
bank  or  Federal  reserve  agent  for  credit  to  its 
or  his  account  with  the  Federal  Reserve  Board. 
The  Secretary  shall  prescribe  by  regulation  the 
form  of  receipt  to  be  issued  by  the  Treasurer 
or  Assistant  Treasurer  to  the  Federal  reserve 
bank  or  Federal  reserve  agent  making  the  de- 


142  APPENDIX  B 

posit,  and  a  duplicate  of  such  receipt  shall  be 
delivered  to  the  Federal  Reserve  Board  by  the 
Treasurer  at  Washington  upon  proper  advices 
from  any  assistant  treasurer  that  such  deposit 
has  been  made.  Deposits  so  made  shall  be  held 
subject  to  the  orders  of  the  Federal  Reserve 
Board  and  shall  be  payable  in  gold  coin  or  gold 
certificates  on  the  order  of  the  Federal  Reserve 
Board  to  any  Federal  reserve  bank  or  Federal 
reserve  agent  at  the  Treasury  or  at  the  Sub- 
treasury  of  the  United  States  nearest  the  place 
of  business  of  such  Federal  reserve  bank  or  such 
Federal  reserve  agent:  Provided,  however.  That 
any  expense  incurred  in  shipping  gold  to  or 
from  the  Treasury  or  subtreasuries  in  order  to 
make  such  payments,  or  as  a  result  of  making 
such  payments,  shall  be  paid  by  the  Federal  Re- 
serve Board  and  assessed  against  the  Federal 
reserve  banks.  The  order  used  by  the  Federal 
Reserve  Board  in  making  such  payments  shall 
be  signed  by  the  governor  or  vice  governor,  or 
such  other  officers  or  members  as  the  board  may 
by  regulation  prescribe.  The  form  of  such  or- 
der shall  be  approved  by  the  Secretary  of  the 
Treasury. 

The  expenses  necessarily  incurred  in  carry- 
ing out  these  provisions,  including  the  cost  of 
the  certificates  or  receipts  issued  for  deposits 
received,  and  all  expenses  incident  to  the  hand- 
ling of  such  deposits  shall  be  paid  by  the  Federal 
Reserve  Board  and  included  in  its  assessments 
against  the  several  Federal  reserve  banks. 

Gold  deposits  standing  to  the  credit  of  any 
Federal  reserve  bank  with  the  Federal  Reserve 
Board  shall,  at  the  option  of  said  bank,  be 
counted  as  part  of  the  lawful  reserve  which  it  is 
required  to  maintain  against  outstanding  Fed- 
eral reserve  notes,  or  as  a  part  of  the  reserve 
it  is  required  to  maintain  against  deposits. 


APPENDIX  B  143 

Nothing  in  this  section  shall  be  construed  as 
amending  section  six  of  the  Act  of  March  four- 
teenth, nineteen  hundred,  as  amended  by  the 
Acts  of  March  fourth,  nineteen  hundred  and 
seven,  March  second,  nineteen  hundred  and 
eleven,  and  June  twelfth,  nineteen  hundred  and 
sixteen,  nor  shall  the  provisions  of  this  section 
be  construed  to  apply  to  the  deposits  made  or 
to  the  receipts  or  certificates  issued  under  those 
Acts. 

Sec.   17.^So  much  of  the  provisions  of  section 
fifty-one  hundred  and  fifty-nine  of  the  Revised 
Statutes  of  the  United  States,  and  section  four 
of  the  Act  of  June  twentieth,  eighteen  hundred 
and  seventy-four,  and  section  eight  of  the  Act  of      ^fP°'jj*     °  * 
July  twelfth,  eighteen  hundred  and  eighty-two,  tional     ^banks 
and  of  any  other  provisions  of  existing  statutes  ^^'^^  *^s*^as"a 
as  require  that  before  any  national  banking  as-  condition     of 
sociation  shall  be  authorized  to  commence  bank-  Smfsr^"  n 
ing  business  it  shall  transfer  and  deliver  to  the  longer  re 
Treasurer  of  the  United  States  a  stated  amount  ^***" 
of  United  States  registered  bonds,  and  so  much 
of  those  provisions  or  of  any  other  provisions 
of    existing    statutes    as    require    any    national 
banking  association  now  or  hereafter  organized 
to  maintain  a  minimum  deposit  of  such  bonds 
with  the  Treasurer  is  hereby  repealed. 

REFUNDING   BONDS 

Sec.  18.  After  two  years  from  the  passage 
of  this  Act,  and  at  any  time  during  a  period  of 
twenty  years  thereafter,  any  member  bank  de- 
siring to  retire  the  whole  or  any  part  of  its 
circulating  notes,  may  file  with  the  Treasurer 
of  the  United  States  an  application  to  sell  for 
its  account,  at  par  and  accrued  interest,  United 
States  bonds  securing  circulation  to  be  retired. 

lAs  amended  by  act  approved  June  21,  1917  (40 
Stat.,  chap.  32). 


n  o 


144  APPENDIX  B 

The  Treasurer  shall^  at  the  end  of  each  quar- 
terly period,  furnish  the  Federal  Reserve  Board 
with  a  list  of  such  applications,  and  the  Federal 
Reserve  Board  may,  in  its  discretion,  require 
the  Federal  reserve  banks  to  purchase  such 
bonds  from  the  banks  whose  applications  have 
been  filed  with  the  Treasurer  at  least  ten  days 
before  the  end  of  any  quarterly  period  at  which 
the  Federal  Reserve  Board  may  direct  the  pur- 
chase to  be  made:  Provided,  That  Federal  re- 
serve banks  shall  not  be  permitted  to  purchase 
an  amount  to  exceed  $25,000,000  of  such  bonds 
in  any  one  year,  and  which  amount  shall  include 
bonds  acquired  under  section  four  of  this  Act  by 
the  Federal  reserve  bank. 

Provided  further.  That  the  Federal  Reserve 
'Board  shall  allot  to  each  Federal  reserve  bank 
such  proportion  of  such  bonds  as  the  capital 
and  surplus  of  such  bank  shall  bear  to  the  ag- 
gregate capital  and  surplus  of  all  the  Federal 
reserve  banks. 

Upon  notice  from  the  Treasurer  of  the  amount 
of  bonds  so  sold  for  its  account,  each  member 
bank  shall  duly  assign  and  transfer,  in  writing, 
such  bonds  to  the  Federal  reserve  bank  purchas- 
ing the  same,  and  such  Federal  reserve  bank 
shall,  thereupon,  deposit  lawful  money  with  the 
Treasurer  of  the  United  States  for  the  purchase 
price  of  such  bonds,  and  the  Treasurer  shall  pay 
to  the  member  bank  selling  such  bonds  any  bal- 
ance due  after  deducting  a  sufficient  sum  to  re- 
deem its  outstanding  notes  secured  by  such 
bonds,  which  notes  shall  be  canceled  and  per- 
manently retired  when  redeemed. 

The  Federal  reserve  banks  purchasing  such 
bonds  shall  be  permitted  to  take  out  an  amount 
of  circulating  notes  equal  to  the  par  value  of 
such  bonds. 

Upon  the  deposit  with  the  Treasurer  of  the 


APPENDIX  B 


145 


United  States  of  bonds  so  purchased,  or  any 
bonds  with  the  circulating  privilege  acquired 
under  section  four  of  this  Act,  any  Federal  re- 
serve bank  making  such  deposit  in  the  manner 
provided  by  existing  law,  shall  be  entitled  to 
receive  from  the  Comptroller  of  the  Currency 
circulating  notes  in  blank,  registered  and  coun- 
tersigned as  provided  by  law,  equal  in  amount 
to  the  par  value  of  the  bonds  so  deposited.  Such 
notes  shall  be  the  obligations  of  the  Federal  re- 
serve bank  procuring  the  same,  and  shall  be  in 
form  prescribed  by  the  Secretary  of  the  Treas- 
ury, and  to  the  same  tenor  and  effect  as  na- 
tional-bank notes  now  provided  by  law.  They 
shall  be  issued  and  redeemed  under  the  same 
terms  and  conditions  as  national-bank  notes  ex- 
cept that  they  shall  not  be  limited  to  the  amount 
of  the  capital  stock  of  the  Federal  reserve  bank 
issuing  them. 

Upon  application  of  any  Federal  reserve 
bank,  approved  by  the  Federal  Reserve  Board, 
the  Secretary  of  the  Treasury  may  issue,  in  ex- 
change for  United  States  two  per  centum  gold 
bonds  bearing  the  circulation  privilege,  but 
against  which  no  circulation  is  outstanding,  one- 
year  gold  notes  of  the  United  States  without 
the  circulation  privilege,  to  an  amount  not  to 
exceed  one-half  of  the  two  per  centum  bonds  so 
tendered  for  exchange,  and  thirty-year  three  per* 
centum  gold  bonds  without  the  circulation  privi- 
lege for  the  remainder  of  the  two  per  centum 
bonds  so  tendered:  Provided,  That  at  the  time 
of  such  exchange  the  Federal  reserve  bank  ob- 
taining such  one-year  gold  notes  shall  enter  into 
an  obligation  with  the  Secretary  of  the  Treas- 
ury binding  itself  to  purchase  from  the  United 
States  for  gold  at  the  maturity  of  such  one- 
year  notes,  an  amount  equal  to  those  delivered 
in  exchange  for  such  bonds,  if  so  requested  by 


Federal     re- 
serve bank 
notes. 


Substitution 
for  2  per  cent 
bonds  of  30- 
year  3  per 
cent  bonds  and 
one-year  3  per 
cent    notes. 


146  APPENDIX  B 

the  Secretary,  and  at  each  maturity  of  one-year 
notes  so  purchased  by  such  Federal  reserve 
bank,  to  purchase  from  the  United  States  such 
an  amount  of  one-year  notes  as  the  Secretary 
may  tender  to  such  bank,  not  to  exceed  the 
amount  issued  to  such  bank  in  the  first  instance, 
in  exchange  for  the  two  per  centum  United 
States  gold  bonds;  said  obligation  to  purchase 
at  maturity  such  notes  shall  continue  in  force 
for  a  period  not  to  exceed  thirty  years. 

For  the  purpose  of  making  the  exchange  here- 
in provided  for,  the  Secretary  of  the  Treasury 
is  authorized  to  issue  at  par  Treasury  notes  in 
coupon  or  registered  form  as  he  may  prescribe 
in  denominations  of  one  hundred  dollars,  or  any 
multiple  thereof,  bearing  interest  at  the  rate  of 
three  per  centum  per  annum,  payable  quarterly, 
such  Treasury  notes  to  be  payable  not  more 
than  one  year  from  the  date  of  their  issue  in 
gold  coin  of  the  present  standard  value,  and  to 
be  exempt  as  to  principal  and  interest  from  the 
payment  of  all  taxes  and  duties  of  the  United 
States  except  as  provided  by  this  Act,  as  well 
as  from  taxes  in  any  form  by  or  under  State, 
municipal,  or  local  authorities.  And  for  the 
same  purpose,  the  Secretary  is  authorized  and 
empowered  to  issue  United  States  gold  bonds 
at  par,  bearing  three  per  centum  interest  pay- 
able thirty  years  from  date  of  issue,  such  bonds 
to  be  of  the  same  general  tenor  and  effect  and 
to  be  issued  under  the  same  general  terms  and 
conditions  as  the  United  States  three  per  centum 
bonds  without  the  circulation  privilege  now  is- 
sued and  outstanding. 

Upon  application  of  any  Federal  reserve  bank, 
approved  by  the  Federal  Reserve  Board,  the 
Secretary  may  issue  at  par  such  three  per  cent- 
um bonds  in  exchange  for  the  one-year  gold 
notes  herein  provided  for. 


APPENDIX  B  147 

BANK    RESERVES 

Sec.  19.^  Demand  deposits  within  the  positT^and  ^ 
meaning  of  this  Act  shall  comprise  all  deposits  **™^  deposits. 
payable  within  thirty  days,  and  time  deposits 
shall  comprise  all  deposits  payable  after  thirty 
days,  all  savings  accounts  and  certificates  of  de- 
posit which  are  subject  to  not  less  than  thirty 
days'  notice  before  payment,  and  all  postal  sav- 
ings deposits.^ 

Every  bank,  banking  association,  or  trust  com- 
pany which  is  or  which  becomes  a  member  of 
any  Federal  reserve  bank  shall  establish  and 
maintain  reserve  balances  with  its  Federal  re- 
serve bank  as  follows: 

(a)  If  not  in  a  reserve  or  central  reserve  „  Reserves  of 
city,  as  now  or  hereafter  defined,  it  shall  hold  banks. '^ 
and  maintain  with  the  Federal  reserve  bank  of 
its  district  an  actual  net  balance  equal  to  not 
less  than  seven  per  centum  of  the  aggregate 
amount  of  its  demand  deposits  and  three  per 
centum  of  its  time  deposits. 

(6)   If  in  a  reserve  city,  as  now  or  hereafter 
defined,  it  shall  hold  and  maintain  with  the  Fed-  ^eft^T^ci t°y 
eral  reserve  bank  of  its  district  an  actual  net  banks. 
balance  equal  to  not  less  than  ten  per  centum 
of  the  aggregate  amount  of  its  demand  deposits 
and  three  per  centum  of  its  time  deposits. 

(c)  If  in  a  central  reserve  city,  as  now  or  Reserves  of 
hereafter  defined,  it  shall  hold  and  maintain  eft"y  "ink"'''^' 
with  the  Federal  reserve  bank  of  its  district  an 
actual  net  balance  equal  to  not  less  than  thirteen 
per  centum  of  the  aggregate  amount  of  its  de- 
mand deposits  and  three  per  centum  of  its  time 
deposits. 

lAs  amended  by  act  approved  Aug.  15,  1914  (38 
Stat.,  691,  chap.  252);  act  approved  June  21,  1917 
(40  Stat.,  chap.  32). 

2  Government  deposits  other  than  postal  savings  de- 
posits not  subject  to  reserve  requirements.  See  sec- 
tion 7  of  act  approved  April  24,  1917,  Appendix,  p.  51. 


mg  reserves. 


148  APPENDIX  B 

No  member  bank  shall  keep  on  deposit  with 
any  State  bank  or  trust  company  which  is  not 
a  member  bank  a  sum  in  excess  of  ten  per  cent- 
um of  its  own  paid-up  capital  and  surplus.  No 
member  bank  shall  act  as  the  medium  or  agent 
of  a  nonmember  bank  in  applying  for  or  receiv- 
ing discounts  from  a  Federal  reserve  bank  un- 
der the  provisions  of  this  Act,  except  by  permis- 
sion of  the  Federal  Reserve  Board. 
Other  pro-  The  required  balance  carried  by  a  member 

visions  regard-  bank  with  a  Federal  reserve  bank  may,  under 

met  reserves.  *  •' 

the  regulations  and  subject  to  such  penalties  as 
may  be  prescribed  by  the  Federal  Reserve 
Board,  be  checked  against  and  withdrawn  by 
such  member  bank  for  the  purpose  of  meeting 
existing  liabilities:  Provided,  however.  That  no 
bank  shall  at  any  time  make  new  loans  or  shall 
pay  any  dividends  unless  and  until  the  total  bal- 
ance required  by  law  is  fully  restored. 

In  estimating  the  balances  required  by  this 
Act,  the  net  difference  of  amounts  due  to  and 
from  other  banks  shall  be  taken  as  the  basis  for 
ascertaining  the  deposits  against  which  required 
balances  with  Federal  reserve  banks  shall  be  de- 
termined. 

National  banks,  or  banks  organized  under  lo- 
cal laws,  located  in  Alaska  or  in  a  dependency 
or  insular  possession  or  any  part  of  the  United 
States  outside  the  continental  United  States  may 
remain  nonmember  banks,  and  shall  in  that 
event  maintain  reserves  and  comply  with  all  the 
conditions  now  provided  by  law  regulating  them ; 
or  said  banks  may,  with  the  consent  of  the  Re- 
serve Board,  become  member  banks  of  any  one 
of  the  reserve  districts,  and  shall  in  that  event 
take  stock,  maintain  reserves,  and  be  subject  to 
all  the  other  provisions  of  this  Act. 

Sec.  20.  So  much  of  sections  two  and  three 
of  the  Act  of  June  twentieth,  eighteen  hundred 


APPENDIX  B  14.9 

and  seventy-four,  entitled  "An  Act  fixing  the  cent  ^*  redemp- 
amount  of  United  States  notes,  providing  for  a  tion   fund   no 
redistribution  of  the  national-bank  currency,  and  ^bil^L  par"°o*f 
for  other  purposes,"  as  provides  that  the  fund  legal  reserve, 
deposited  by  any  national  banking  association 
with  the  Treasurer  of  the  United  States  for  the 
redemption  of  its  notes  shall  be  counted  as  a 
part  of  its  lawful  reserve  as  provided  in  the 
Act  aforesaid,  is  hereby  repealed.     And  from 
and  after  the  passage  of  this  Act  such  fund  of 
five  per  centum  shall  in  no  case  be  counted  by 
any  national  banking  association  as  a  part  of 
its  lawful  reserve. 

BANK   EXAMINATIONS 

Sec.  21.  Section  fifty-two  hundred  and  forty, 
United  States  Revised  Statutes,  is  amended  to 
read  as  follows: 

The  Comptroller  of  the  Currency,  with  the  ^Exammation 
approval  of  the  Secretary  of  the  Treasury,  shall  banks. 
atppoint  examiners  whfo  shall  examine  every 
member  bank^  at  least  twice  in  each  calendar 
year  and  oftener  if  considered  necessary:  Pro- 
vided, however.  That  the  Federal  Reserve  Board 
may  authorize  examination  by  the  State  authori- 
ties to  be  accepted  in  the  case  of  State  banks  and 
trust  companies  and  may  at  any  time  direct  the 
holding  of  a  special  examination  of  State  banks 
or  trust  companies  that  are  stockholders  in  any 
Federal  reserve  bank.  The  examiner  making 
the  examination  of  any  national  bank,  or  of  any 
other  member  bank,  shall  have  power  to  make 
a  thorough  examination  of  all  the  affairs  of  the 
bank,  and  in  doing  so  he  shall  have  power  to 
administer  oaths  and  to  examine  any  of  the  offi- 
cers and  agents  thereof  under  oath  and  shall 

1  Except  banks  admitted  to  membership  in  the  sys- 
tem under  authority  of  section  9  of  this  act.  See 
section  9  of  this  act  as  amended  by  act  approved  , 

June  21,  1917. 


150 


APPENDIX  B 


Additional 
examinations 
by    federal    re- 
serve    authori- 
ties authorized. 


Exanrination 
of  federal  re- 
serve banks. 


make  a  full  and  detailed  report  of  the  condition 
of  said  bank  to  the  Comptroller  of  the  Currency. 

The  Federal  Reserve  Board,  upon  the  recom- 
mendation of  the  Comptroller  of  the  Currency, 
shall  fix  the  salaries  of  all  bank  examiners  and 
make  report  thereof  to  Congress.  The  expense 
of  the  examinations  herein  provided  for  shall  be 
assessed  by  the  Comptroller  of  the  Currency 
upon  the  banks  examined  in  proportion  to  as- 
sets or  resources  held  by  the  banks  upon  the 
dates  of  examination  of  the  various  banks. 

In  addition  to  the  examinations  made  and 
conducted  by  the  Comptroller  of  the  Currency, 
every  Federal  reserve  bank  may,  with  the  ap- 
proval of  the  Federal  reserve  agent  or  the  Fed- 
eral Reserve  Board,  provide  for  special  exami- 
nation of  member  banks  virithin  its  district. 
The  expense  of  such  examinations  shall  be 
borne  by  the  bank  examined.  Such  examina- 
tions shall  be  so  conducted  as  to  inform  the 
Federal  reserve  bank  of  the  condition  of  its 
member  banks  and  of  the  lines  of  credit  which 
are  being  extended  by  them.  Every  Federal  re- 
serve bank  shall  at  all  times  furnish  to  the  Fed- 
eral Reserve  Board  such  information  as  may 
be  demanded  concerning  the  condition  of  any 
member  bank  within  the  district  of  the  said 
Federal  reserve  bank. 

No  bank  shall  be  subject  to  any  visitorial 
powers  other  than  such  as  are  authorized  by 
law,  or  vested  in  the  courts  of  justice  or  such  as 
shall  be  or  shall  have  been  exercised  or  directed 
by  Congress,  or  by  either  House  thereof  or  by 
any  committee  of  Congress  or  of  either  House 
duly  authorized. 

The  Federal  Reserve  Board  shall,  at  least 
once  each  year,  order  an  examination  of  each 
Federal  reserve  bank,  and  upon  joint  applica- 
tion of  ten  member  banks  the  Federal  Reserve 


APPENDIX  B 


151 


Restrictions 
imposed     upon 


Board  shall  order  a  special  examination  and 
report  of  the  condition  of  any  Federal  reserve 
bank. 

Sec.  22.^  No  member  bank  or  any  officer, 
director,  or  employee  thereof  shall  hereafter 
make  any  loan  or  grant  any  gratuity  to  any  bank  officials, 
bank  examiner.  Any  bank  officer,  director,  or  eSm^inlrs.  ^""^ 
employee  violating  this  provision  shall  be 
deemed  guilty  of  a  misdemeanor  and  shall  be 
imprisoned  not  exceeding  one  year  or  fined  not 
more  than  $5,000,  or  both;  and  may  be  fined  a 
further  sum  equal  to  the  money  so  loaned  or 
gratuity  given.  Any  examiner  accepting  a  loan 
or  gratuity  from  any  bank  examined  by  him  or 
from  an  officer,  director,  or  employee  thereof 
shall  be  deemed  guilty  of  a  misdemeanor  and 
shall  be  imprisoned  not  exceeding  one  year  or 
fined  not  more  than  $5,000,  or  both;  and  may 
be  fined  a  further  sum  equal  to  the  money  so 
loaned  or  gratuity  given;  and  shall  forever 
thereafter  be  disqualified  from  holding  office  as 
a  national-bank  examiner.  No  national-bank 
examiner  shall  perform  any  other  service  for 
compensation  while  holding  such  office  for  any 
bank  or  officer,  director,  or  employee  thereof. 

Other  than  the  usual  salary  or  director's  fee 
paid  to  any  officer,  director,  employee,  or  at- 
torney of  a  member  bank,  and  other  than  a  rea- 
sonable fee  paid  by  said  bank  to  such  officer, 
director,  employee,  or  attorney  for  services  ren- 
dered to  such  bank,  no  officer,  director,  em- 
ployee, or  attorney  of  a  member  bank  shall  be 
a  beneficiary  of  or  receive,  directly  or  indirectly, 
any  fee,  commission,  gift,  or  other  consideration 
for  or  in  connection  with  any  transaction  or 
business  of  the  bank:  Provided,  however.  That 
nothing  in  this  act  contained  shall  be  construed 

1  As  amended  by  act  approved  June  21,  1917   (40 
Stat.,  chap.  32). 


152  APPENDIX  B 

to  prohibit  a  director,  officer,  employee,  or  at- 
torney from  receiving  the  same  rate  of  interest 
paid  to  other  depositors  for  similar  deposits 
made  with  such  bank:  And  provided  further, 
That  notes,  drafts,  bills  of  exchange,  or  other 
evidences  of  debt  executed  or  indorsed  by  di- 
rectors or  attorneys  of  a  member  bank  may  be 
discounted  with  such  member  bank  on  the  same 
terms  and  conditions  as  other  notes,  drafts,  bills 
of  exchange,  or  evidences  of  debt  upon  the  affir- 
mative vote  or  written  assent  of  at  least  a  ma- 
jority of  the  members  of  the  board  of  directors 
of  such  member  bank.  No  examiner,  public  or 
private,  shall  disclose  the  names  of  borrowers 
or  the  collateral  for  loans  of  a  member  bank  to 
other  than  the  proper  officers  of  such  bank  with- 
out first  having  obtained  the  express  permission 
in  writing  from  the  Comptroller  of  the  Cur- 
rency, or  from  the  board  of  directors  of  such 
bank,  except  when  ordered  to  do  so  by  a  court 
of  competent  jurisdiction,  or  by  direction  of  the 
Congress  of  the  United  States,  or  of  either 
House  thereof,  or  any  committee  of  Congress 
or  of  either  House  duly  authorized.  Any  per- 
son violating  any  provision  of  this  section  shall 
be  punished  by  a  fine  of  not  exceeding  $5,000 
or  by  imprisonment  not  exceeding  one  year,  or 
both. 

Except  as  provided  in  existing  laws,  this  pro- 
vision shall  not  take  effect  until  sixty  days  af- 
ter the  passage  of  this  Act. 

bih?°"of^  tock        ^^^'  ^^'     "^^^  stockholders  of  every  national 
holders.  banking  association   shall  be  held  individually 

responsible  for  all  contracts,  debts,  and  engage- 
ments of  such  association,  each  to  the  amount 
of  his  stock  therein,  at  the  par  value  thereof  in 
addition  to  the  amount  invested  in  such  stock. 
The  stockholders  in  any  national  banking  asso- 


APPENDIX  B  163 

elation  who  shall  have  transferred  their  shares 
or  registered  the  transfer  thereof  within  sixty 
days  next  before  the  date  of  the  failure  of  such 
association  to  meet  its  obligations,  or  with 
knowledge  of  such  impending  failure,  shall  be 
liable  to  the  same  extent  as  if  they  had  made 
no  such  transfer,  to  the  extent  that  the  subse- 
quent transferee  fails  to  meet  such  liability;  but 
this  provision  shall  not  be  construed  to  affect  in 
any  way  any  recourse  which  such  shareholders 
might  otherwise  have  against  those  in  whose 
names  such  shares  are  registered  at  the  time  of 
such  failure. 

LOANS    ON    FARM    LANDS 

Sec.  24.^  Any  national  banking  association 
not  situated  in  a  central  reserve  city  may  make 
loans  secured  by  improved  and  unencumbered 
farm  land  situated  within  its  Federal  reserve 
district  or  within  a  radius  of  one  hundred  miles 
of  the  place  in  which  such  bank  is  located,  ir- 
respective of  district  lines,  and  may  also  make 
loans  secured  by  improved  and  unencumbered 
real  estate  located  within  one  hundred  miles  of 
the  place  in  which  such  bank  is  located,  irre- 
spective of  district  lines;  but  no  loan  made 
upon  the  security  of  such  farm  land  shall  be 
made  for  a  longer  time  than  five  years,  and  no 
loan  made  upon  the  security  of  such  real  estate 
as  distinguished  from  farm  land  shall  be  made 
for  a  longer  time  than  one  year  nor  shall  the 
amount  of  any  such  loan,  whether  upon  such 
farm  land  or  upon  such  real  estate,  exceed  fifty 
per  centum  of  the  actual  value  of  the  property 
offered  as  security.  Any  such  bank  may  make 
such  loans,  whether  secured  by  such  farm  land 
or  such  real  estate,  in  an  aggregate  sum  equal 

lAs  amended  by  act  approved  Sept.  7,  1916  (39 
Stat,  752,  chap.  461). 


164  APPENDIX  B 

to  twenty-five  per  centum  of  its  capital  and  sur- 
plus or  to  one-third  of  its  time  deposits  and 
such  banks  may  continue  hereafter  as  hereto- 
fore to  receive  time  deposits  and  to  pay  interest 
on  the  same. 

The  Federal  Reserve  Board  shall  have  power 
from  time  to  time  to  add  to  the  list  of  cities  in 
which  national  banks  shall  not  be  permitted  to 
make  loans  secured  upon  real  estate  in  the  man- 
ner described  in  this  section. 

FOREIGN    BRANCHES 

Sec.  25.^  Any  national  banking  association 
possessing  a  capital  and  surplus  of  $1,000,000 
or  more  may  file  application  with  the  Federal 
Reserve  Board  for  permission  to  exercise,  upon 
such  conditions  and  under  such  regulations  as 
may  be  prescribed  by  the  said  board,  either  or 
both  of  the  following  powers: 

First.  To  establish  branches  in  foreign  coun- 
tries or  dependencies  or  insular  possessions  of 
the  United  States  for  the  furtherance  of  the 
foreign  commerce  of  the  United  States,  and  to 
act  if  required  to  do  so  as  fiscal  agents  of  the 
United  States. 

Second.  To  invest  an  amount  not  exceeding 
in  the  aggregate  ten  per  centum  of  its  paid-in 
capital  stock  and  surplus  in  the  stock  of  one  or 
more  banks  or  corporations  chartered  or  incorp- 
orated under  the  laws  of  the  United  States  or 
of  any  State  thereof,  and  principally  engaged 
in  international  or  foreign  banking,  or  banking 
in  a  dependency  or  insular  possession  of  the 
United  States  either  directly  or  through  the 
agency,  ownership,  or  control  of  local  institu- 
tions in  foreign  countries,  or  in  such  depend- 
encies or  insular  possessions. 

1  As  amended  by  act  approved  Sept.  7,  1916    (39 
Stat.,  752y  chap.  461). 


APPENDIX  B  166 

Such  application  shall  specify  the  name  and 
capital  of  the  banking  association  filing  it,  the 
powers  applied  for,  and  the  place  or  places 
where  the  banking  operations  proposed  are  to 
be  carried  on.  The  Federal  Reserve  Board 
shall  have  power  to  approve  or  to  reject  such 
application  in  whole  or  in  part  if  for  any  reason 
the  granting  of  such  application  is  deemed  in- 
expedient, and  shall  also  have  power  from  time 
to  time  to  increase  or  decrease  the  number  of 
places  where  such  banking  operations  may  be 
carried  on. 

Every  national  banking  association  operating  Supervision 
foreign  branches  shall  be  required  to  furnish  in-  J^^^^^J^'j^" 
formation  concerning  the  condition  of  such 
branches  to  the  Comptroller  of  the  Currency 
upon  demand,  and  every  member  bank  investing 
in  the  capital  stock  of  banks  or  corporations  de- 
scribed under  subparagraph  two  of  the  first 
paragraph  of  this  section  shall  be  required  to 
furnish  information  concerning  the  condition  of 
such  banks  or  corporations  to  the  Federal  Re- 
serve Board  upon  demand,  and  the  Federal  Re- 
serve Board  may  order  special  examinations  of 
the  said  branches,  banks,  or  corporations  at 
such  time  or  times  as  it  may  deem  best. 

Before  any  national  bank  shall  be  permitted  Restrictions 
to  purchase  stock  in  any  such  corporation  the  branches. 
said  corporation  shall  enter  into  an  agreement 
or  undertaking  with  the  Federal  Reserve  Board 
to  restrict  its  operations  or  conduct  its  business 
in  such  manner  or  under  such  limitations  and 
restrictions  as  the  said  board  may  prescribe  for 
the  place  or  places  wherein  such  business  is  to 
be  conducted.  If  at  any  time  the  Federal  Re- 
serve Board  shall  ascertain  that  the  regulations 
prescribed  by  it  are  not  being  complied  with, 
said  board  is  hereby  authorized  and  empowered 
to  institute  an  investigation  of  the  matter  and 


156  APPENDIX  B 

to  send  for  persons  and  papers,  subpoena  wit- 
nesses, and  administer  oaths  in  order  to  satisfy 
itself  as  to  the  actual  nature  of  the  transac- 
tions referred  to.  Should  such  investigation 
result  in  establishing  the  failure  of  the  corpo- 
ration in  question,  or  of  the  national  bank  or 
banks  which  may  be  stockholders  therein,  to 
comply  with  the  regulations  laid  down  by  the 
said  Federal  Reserve  Board,  such  national 
banks  may  be  required  to  dispose  of  stock 
holdings  in  the  said  corporation  upon  reasonable 
notice.  _ 

Every  such  national  banking  association  shall 
conduct  the  accounts  of  each  foreign  branch  inJ 
dependently  of  the  accounts  of  other  foreigJ 
branches  established  by  it  and  of  its  home  of- 
fice, and  shall  at  the  end  of  each  fiscal  period 
transfer  to  its  general  ledger  the  profit  or  loss 
accrued  at  each  branch  as  a  separate  item. 

Any  director  or  other  officer,  agent,  or  em- 
ployee of  any  member  bank  may,  with  the  ap- 
proval of  the  Federal  Reserve  Board,  be  a  di- 
rector or  other  officer,  agent,  or  employee  of 
any  such  bank  or  corporation  above  mentioned 
in  the  capital  stock  of  which  such  member  bank 
shall  have  invested  as  hereinbefore  provided, 
without  being  subject  to  the  provisions  of  sec- 
tion eight  of  the  Act  approved  October  fifteen, 
nineteen  hundred  and  fourteen,  entitled  "An 
Act  to  supplement  existing  laws  against  unlaw- 
ful restraints  and  monopolies,  and  for  other 
purposes." 

ard'^reaffirmed  ^^^*  ^^'  ^^^  provisions  of  law  inconsistent 
with  or  superseded  by  any  of  the  provisions  of 
this  Act  are  to  that  extent  and  to  that  extent 
only  hereby  repealed:  Provided,  Nothing  in 
this  Act  contained  shall  be  construed  to  repeat 
the  parity  provision  or  provisions  contained  i*" 


APPENDIX  B 


157 


an  Act  approved  March  fourteenth,  nineteen 
hundred,  entitled  'An  Act  to  define  and  fix  the 
standard  of  value,  to  maintain  the  parity  of  all 
forms  of  money  issued  or  coined  by  the  United 
States,  to  refund  the  public  debt,  and  for  other 
purposes,"  and  the  Secretary  of  the  Treasury 
may,  for  the  purpose  of  maintaining  such  parity 
and  to  strengthen  the  gold  reserve,  borrow  gold 
on  the  security  of  United  States  bonds  author- 
ized by  section  two  of  the  Act  last  referred  to 
or  for  one-year  gold  notes  bearing  interest  at 
a  rate  of  not  to  exceed  three  per  centum  per 
annum,  or  sell  the  same  if  necessary  to  obtain 
gold.  When  the  funds  of  the  Treasury  on  hand 
justify,  he  may  purchase  and  retire  such  out- 
standing bonds  and  notes.  / 

Sec.  27.'     The  provisions  of  the  Act  of  May  vrldand"^' 
thirtieth,  nineteen  hundred  and  eight,  authoriz-  emergency 

^.         1  '    .'  J^^l      •  r    act"     extended 

ing  national  currency  associations,  the  issue  of  to  June  30, 
additional  national-bank  circulation,  and  creat-  ^^^l^  *"**  "' 
ing  a  National  Monetary  Commission,  which  ex- 
pires by  limitation  under  the  terms  of  such  Act 
on  the  thirtieth  day  of  June,  nineteen  hundred 
and  fourteen,  are  hereby  extended  to  June  thir- 
tieth, nineteen  hundred  and  fifteen,  and  sections 
fifty-one  hundred  and  fifty-three,  fifty-one  hun- 
dred and  seventy -two,  fifty-one  hundred  and 
ninety-one,  and  fifty- two  hundred  and  fourteen 
of  the  Revised  Statutes  of  the  United  States, 
which  were  amended  by  the  Act  of  May  thir- 
tieth, nineteen  hundred  and  eight,  are  hereby  re- 
enacted  to  read  as  such  sections  read  prior  to 
May  thirtieth,  nineteen  hundred  and  eight,  sub- 
ject to  such  amendments  or  modifications  as  are 
prescribed  in  this  Act:  Provided,  however.  That 
section  nine  of  the  Act  first  referred  to  in  this 

1  As  amended  by  act  approved  Aug.  4,  1914   (38 
Stat.,  682,  chap.  225). 


158  APPENDIX  B 

section  is  hereby  amended  so  as  to  change  the 
tax  rates  fixed  in  said  Act  by  making  the  por- 
tion applicable  thereto  read  as  follows: 

National  banking  associations  having  circu- 
lating notes  secured  otherwise  than  by  bonds 
of  the  United  States,  shall  pay  for  the  first 
three  months  a  tax  at  the  rate  of  three  per 
centum  per  annum  upon  the  average  amount  of 
such  of  their  notes  in  circulation  as  are  based 
upon  the  deposit  of  such  securities,  and  after- 
wards an  additional  tax  rate  of  one-half  of  one 
per  centum  per  annum  for  each  month  until  a 
tax  of  six  per  centum  per  annum  is  reached,  and 
thereafter  such  tax  of  six  per  centum  per  an- 
num upon  the  average  amount  of  such  notes: 
Provided  further.  That  whenever  in  his  judg- 
ment he  may  deem  it  desirable,  the  Secretary 
of  the  Treasury  shall  have  power  to  suspend  the 
limitations  imposed  by  section  one  and  section 
three  of  the  Act  referred  to  in  this  section, 
which  prescribe  that  such  additional  circulation 
secured  otherwise  than  by  bonds  of  the  United 
States  shall  be  issued  only  to  National  banks 
having  circulating  notes  outstanding  secured  by 
the  deposit  of  bonds  of  the  United  States  to  an 
amount  not  less  than  forty  per  centum  of  the 
capital  stock  of  such  banks,  and  to  suspend  also 
the  conditions  and  limitations  of  section  five  of 
said  Act  except  that  no  bank  shall  be  permitted 
to  issue  circulating  notes  in  excess  of  one  hun- 
dred and  twenty-five  per  centum  of  its  unim- 
paired capital  and  surplus.  He  shall  require 
each  bank  and  currency  association  to  maintain 
on  deposit  in  the  Treasury  of  the  United  States  . 
a  sum  in  gold  sufficient  in  his  judgment  for  the  j 
redemption  of  such  notes,  but  in  no  event  less  * 
than  five  per  centum.  He  may  permit  National 
banks,  during  the  period  for  which  such  pro- 
visions are  suspended,  to  issue  additional  cir- 
culation under  the  terms  and  conditions  of  the 


APPENDIX  B  169 

Act  referred  to  as  herein  amended:  Provided 
further.  That  the  Secretary  of  the  Treasury,  in 
his  discretion,  is  further  authorized  to  extend 
the  benefits  of  this  Act  to  all  qualified  State 
banks  and  trust  companies,  which  have  joined 
the  Federal  reserve  system,  or  which  may  con- 
tract to  join  within  fifteen  days  after  the  pas- 
sage of  this  Act. 

Sec.  28.  Section  fifty-one  hundred  and  ca^tal"  by "  °^ 
forty-three  of  the  Revised  Statutes  is  hereby  member  banks, 
amended  and  reenacted  to  read  as  follows: 
Any  association  formed  under  this  title  may,  by 
the  vote  of  shareholders  owning  two-thirds  of  its 
capital  stock,  reduce  its  capital  to  any  sum  not 
below  the  amount  required  by  this  title  to 
authorize  the  formation  of  associations;  but  no 
such  reduction  shall  be  allowable  which  will 
reduce  the  capital  of  the  association  below  the 
amount  required  for  its  outstanding  circulation, 
nor  shall  any  reduction  be  made  until  the  amount 
of  the  proposed  reduction  has  been  reported  to 
the  Comptroller  of  the  Currency  and  such  re-  , 
duction  has  been  approved  by  the  said  Comp- 
troller of  the  Currency  and  by  the  Federal  Re- 
serve Board,  or  by  the  organization  committee 
pending  the  organization  of  the  Federal  Reserve 
Board. 

Sec.  29.  If  any  clause,  sentence,  paragraph, 
or  part  of  this  Act  shall  for  any  reason  be  ad- 
judged by  any  court  of  competent  jurisdiction 
to  be  invalid,  such  judgment  shall  not  affect, 
impair,  or  invalidate  the  remainder  of  this  Act, 
but  shall  be  confined  in  its  operation  to  the 
clause,  sentence,  paragraph,  or  part  thereof  di- 
rectly involved  in  the  controversy  in  which  such 
judgment  shall  have  been  rendered. 

Sec.  30.  The  right  to  amend,  alter,  or  re- 
peal this  Act  is  hereby  expressly  reserved. 


APPENDIX  C 

Provisions  of  the  Farm  Loan  Act,  approved 
July  17,  1916,  which  affect  Federal  Reserve 
Banks  and  member  hanks  of  the  Federal  Re- 
serve System. 

FARM   LOAN   ACT 

An  Act  To  provide  capital  for  agricultural 
development,  to  create  standard  forms  of  in- 
vestment based  upon  farm  mortgage,  to  equa- 
lize rates  of  interest  upon  farm  loans,  to  fur- 
nish a  market  for  United  States  bonds,  to  create 
Government  depositaries  and  financial  agents 
for  the  United  States,  and  for  other  purposes. 

capital  stock  of  federal  land  banks 

Sec.  5. — 

*  *  *  *  * 

At  least  twenty-five  per  centum  of  that  part  ,! 
of  the  capital  of  any  Federal  land  bank  for    \ 
which  stock  is  outstanding  in  the  name  of  na-   \ 
tional  farm  loan  associations   shall  be  held  in 
quick  assets,  and  may  consist  of  cash  in  the    \ 
vaults  of  said  land  bank,  or  in  deposits  in  mem-    ' 
ber  banks  of  the  Federal  reserve  system,  or  in 
readily    marketable    securities    which    are    ap- 
proved under  rules  and  regulations  of  the  Fed- 
eral Farm  Loan  Board:  Provided,  That  not  less 
than  five  per  centum  of  such  capital  shall  be 
invested  in  United  States  Government  bonds. 

GOVERNMENT    DEPOSITARIES  \ 

Sec.  6.     That   all   Federal   land  banks   and 
joint   stock   land   banks    organized   under   this 
160  I 


J 


APPENDIX  C  161 

Act,  when  designated  for  that  purpose  by  tHe 
Secretary  of  the  Treasury,  shall  be  depositaries 
of  public  money,  except  receipts  from  customs, 
under  such  regulations  as  may  be  prescribed  by 
said  Secretary;  and  they  may  also  be  employed 
as  financial  agents  of  the  Government;  and  they 
shall  perform  all  such  «uch  reasonable  duties,  as 
depositaries  of  public  money  and  financial 
agents  of  the  Government,  as  may  be  required 
of  them.  And  the  Secretary  of  the  Treasury 
shall  require  of  the  Federal  land  banks  and 
joint  stock  land  banks  thus  designated  satisfac- 
tory security,  by  the  deposit  of  United  States 
bonds  or  otherwise,  for  the  safekeeping  and 
prompt  payment  of  the  public  money  deposited 
with  them,  and  for  the  faithful  performance  of 
their  duties  as  financial  agents  of  the  Govern- 
ment. No  Government  funds  deposited  under 
the  provisions  of  this  section  shall  be  invested 
in  mortgage  loans  or  farm  loan  bonds. 

POWERS    OF    FEDERAL    LAND    BANKS 

Sec.  13.  That  every  Federal  land  bank 
shall  have  power,  subject  to  the  limitations  and 
requirements  of  this  Act — 

*  *  *  *  * 

Fifth.  To  deposit  its  securities,  and  its  cur- 
rent funds  subject  to  check,  with  any  member 
bank  of  the  Federal  Reserve  System,  and  to 
receive  interest  on  the  same  as  may  be  agreed. 

INVESTMENT  IN    FARM    LOAN   BONDS 

Sec.  27.  That  farm  loan  bonds  issued  un- 
der the  provisions  of  this  Act  by  Federal  land 
banks  or  joint  stock  land  banks  shall  be  a  law- 
ful investment  for  all  fiduciary  and  trust  funds, 
and  may  be  accepted  as  security  for  all  public 
deposits. 

Any  member  bank  of  the  Federal  Reserve 


im  APPENDIX  C 

System  may  buy  and  sell  farm  loan  bonds  is- 
sued under  the  authority  of  this  Act. 

Any  Federal  reserve  bank  may  buy  and  sell 
farm  loan  bonds  issued  under  this  Act  to  the 
same  extent  and  subject  to  the  same  limitations 
placed  upon  the  purchase  and  sale  by  said 
banks  of  State,  county,  district,  and  municipal 
bonds  under  subsection  (b)  of  section  fourteen 
of  the  Federal  Reserve  Act  approved  Decem- 
ber twenty-third,  nineteen  hundred  and  thirteen. 


APPENDIX  D 

Section  7  of  '^An  act  to  authorize  an  issue  of 
bonds  to  meet  expenditures  for  the  national 
security  and  defense,  and,  for  the  purpose  of 
assisting  in  the  prosecution  of  the  war,  to 
extend  credit  to  foreign  governments,  and 
for  other  purposes,  approved  April  2Jf.,  1917, 
which  affects  Federal  Reserve  Banks  and 
member  banks  of  the  Federal  Reserve  Sys- 
tem/' 

Sec.  7.  That  the  Secretary  of  the  Treasury, 
in  his  discretion,  is  hereby  authorized  to  de- 
posit in  such  banks  and  trust  companies  as  he 
may  designate  the  proceeds,  or  any  part  there- 
of, arising  from  the  sale  of  the  bonds  and  cer- 
tificates of  indebtedness  authorized  by  this 
Act,  or  the  bonds  previously  authorized  as  de- 
scribed in  section  four  of  this  Act,  and  such  de- 
posits may  bear  such  rate  of  interest  and  be 
subject  to  such  terms  and  conditions  as  the  Sec- 
retary of  the  Treasury  may  prescribe :  Provided,, 
That  the  amount  so  deposited  shall  not  in  any 
case  exceed  the  amount  withdrawn  from  any 
such  bank  or  trust  company  and  invested  in  such 
bonds  or  certificates  of  indebtedness  plus  the 
amount  so  invested  by  such  bank  or  trust  com- 
pany, and  such  deposits  shall  be  secured  in  the 
manner  required  for  other  deposits  by  section 
fifty-one  hundred  and  fifty-three.  Revised  Sta- 
tutes, and  amendments  thereto:  Provided  fur- 
ther. That  the  provisions  of  section  fifty-one 
hundred  and  ninety-one  of  the  Revised  Statutes, 
as  amended  by  the  Federal  Reserve  Act  and  the 
amendments  thereof,  with  reference  to  the  re- 
serves required  to  be  kept  by  national  banking 

163 


164  APPENDIX  D 

associations  and  other  member  banks  of  the  Fed- 
eral Reserve  System^  shall  not  apply  to  de- 
posits of  public  moneys  by  the  United  States  in 
designated  depositaries. 


INDEX  TO  FEDERAL  RESERVE  ACT  AND  ITS 
AMENDMENTS^ 

SECTION 

A 

Acceptances: 

By  member  banks  in  foreign  transactions 13 

By  member  banks  in  domestic  transactions 13 

By  member  banks  to  furnish  dollar  exchange 13 

Purchase  of,  by  Federal  Reserve  Banks 14 

Rediscount  of,  by  Federal  Reserve  Banks 13 

Acts  amended,  repealed,  or  otherwise  referred  to: 

Act  of  June  20,  1874   17,  20 

Act  of  July  12,  1882    17 

Act  of  January  16,  1883 11-1 

Act  of  March    14,    1900 16,  26 

Act  of  March  4,  1907 16 

Act  of  May  30,  1908 16,  27 

Act  of  March  2,  1911 16 

Act  of  October   15,   1914 25 

Act  of  June  12,   1916 16 

United  States  Revised  Statutes,  324 10 

United  States  Revised  Statutes,  5143 28 

United  States  Revised  Statutes,  5153 27 

United  States  Revised  Statutes,  5154 8 

United  States  Revised  Statutes,  5159 17 

United  States  Revised  Statutes,  5172 27 

United  States  Revised  Statutes,  5174 16 

United  States  Revised  Statutes,  5191 27 

United  States  Revised  Statutes,  5202 13 

United  States  Revised  Statutes,  5209 9 

United  States  Revised  Statutes,  5214 27 

United  States  Revised  Statutes,  5240 9,  21 

Agents.     (See  Federal  Reserve  Agent.) 

Amendments,  this  act  subject  to 30 

Applications : 

For  cancellation  of  stock 9 

For  establishment  of  foreign  branches 25 

For  Federal  Reserve  notes 16 

For  membership  in  Federal  Reserve  Banks 4 

Of  State  banks  for  membership 9 

iThis  index  was   compiled   and  officially  published  under  the 
direction  of  the  Federal  Reserve  Board. 

165 


166  INDEX  TO  ACT 


Assessments.     (See  Federal  Reserve  Banks.) 
Assistants  to  Federal  Reserve  Agent 


1^ 


B 

Balances.     (See  Reserve) 19 

To  be  maintained  with  Federal  Reserve  Banks 13 

Banks.      (See  also  State   Banks,   Federal   Reserve   Banks, 
Member  Banks,  and  National  Banks.) 

Acceptance  of  terms  of  Federal  Reserve  act 2 

Conversion  of  State  banks  into  national  banks 8 

Definition    1 

Federal  Reserve  Bank.     (See  Federal  Reserve  Banks.) 
Reserve  banks   defined 

Bank  acceptances  (see  also  Acceptances),  purchase  of 14 

Bank  examinations.     (See  Examinations.) 

Bank  reserves.     (See  Reserve.) 

Board: 

Definition    

Federal  reserve.     (See  Federal  Reserve  Board.) 

Bonds: 

Deposit  requirement  of  national  banks  repealed 17 

Exchange  of  2  per  cent  for  3  per  cent 18 

Federal    Reserve    Agents 11-1 

Federal  Reserve  Banks  must  purchase 18 

Limitation  on  amount  to  be  purchased 18 

Notes  against  bonds  purchased 18 

Officers  and  employees  of  Federal  Reserve  Banks 4 

Refunding  18 

Repurchase  of  1-year  bonds  from  year  to  year 18 

Revenue  bonds,  purchase  by  Federal  Reserve  Banks . .         14 

Branch  banks  of  Federal  Reserve  Banks 3 

C 

Capital  stock.     (See  stock.) 

Central  reserve  cities: 

Classification  by  Federal  Reserve  Board 11-e 

Previous  status  not  changed 2 

Certifying  checks  against  insufficient  funds 9 

Validity  of  checks  certified  against  insufficient  funds . .  9 

Clearing  house: 

Federal  Reserve  Bank  to  act  as 16 

Federal  Reserve  Board  may  act  as 16 

Federal  Reserve  Board  to  fix  charges 16 

Collections: 

By  Federal  Reserve  Banks 13 

Expenses  of  16 


INDEX  TO  ACT  167 

BECnOK 

Comptroller  of  Currency: 

Authorizing  Federal  Reserve  Banks  to  commence  busi- 
ness      4 

Ex-oflEicio  member  of  Federal  Reserve  Board 10 

D 

Demand  deposits,  definition 19 

Deposits.     {See  also  Government  deposits.) 

Demand   19 

Reserve  against.     (See  Reserve.) 

Time   19 

What  deposits  accepted  by  Federal  Reserve  Bank 13 

Deputy  chairman: 

Appointment    4 

Duties 4 

Directors : 

Branch  banks    3 

Federal  Reserve  Bank — 

Appointment  of  Class  C 4 

Classes  B  and  C  not  to  be  officers,  directors,  or  em- 
ployees of  banks 4 

Classification    4 

Duties    4 

Election  of  Classes  A  and  B 4 

Expenses   4 

Nomination    4 

Qualifications   4 

Senators   and   Representatives  ineligible 4 

Term  of  office 4 

Vacancies  to  be  filled '4 

Member  banks — 

Fees  or  commission  prohibited 22 

Interest  on  deposits  allowed 22 

Member  of  Federal  Reserve  Board  ineligible 10 

Penalty  for  accepting  fees  or  commissions 22 

National   banks,   personal   liability    for    noncompliance 

with  the  act 2 

Removal  of 11-f 

Discounts : 

(See  also  Rediscounts.) 

Of  member  banks'  own  paper 13 

Rate  subject  to  regulation  of  Federal  Reserve  Board..  14 

Federal  advisory  council  to  recommend  rate 12 

Dissolution: 

Effect 3 

National  bank,  for  failure  to  comply  with  the  act 3 

Survival  of   remedies   and   penalties   against   dissolved 

bank    9 


168  INDEX  TO  ACT 


BECTIOSr 

District: 

Definition    1 

Federal  Reserve.     (See  Federal  Reserve  District.) 

District   reserve   electors 4 

Dividends,  Federal  Reserve  Banks 7 

E 

Earnings : 

Federal  Reserve  Banks,  how  distributed 7 

Franchise  tax  on  Federal  Reserve  Banks 7 

Surplus  fund  of  Federal  Reserve  Banks 7 

United  States  earnings,  how  applied 7 

Elections : 

Directors  of  Federal  Reserve  Banks 4 

Emergency  currency:  Limitations  of,  act  of  May  30,  1908, 

extended  to  June  30,  1915 27 

Examinations : 

Expenses    21 

Federal  Reserve  Banks 21 

Federal   Reserve    Board   given   power   to   examine   all 

member  banks   11-a 

Member   banks    21 

Other  visitatorial  powers 21 

Special  examinations  by  Federal  Reserve  Bank 21 

State  banks    9 

State  examinations  may  be  accepted 21 

Examiners: 

Accepting  loan  or  gratuity 22 

Appointment    21 

Disclosure  of  confidential  information 22 

Disqualification    22 

Loans  and  gratuities  must  not  be  made  to 22 

Other  services  shall  not  be  performed  by 22 

Penalty  for  accepting  loan  or  gratuity 22 

Penalty  for  disclosure  of  confidential  information 22 

Powers   21 

Salary    21 

Exchange : 

Not  to  be  charged  against  Federal  Reserve  Banks 13 

Not  prohibited  in  certain  cases 13 

Regulated  by  Federal  Reserve  Board 13 

Exemption  of  Federal  Reserve  Banks  from  taxation 7 

F 
Farm  lands.     (See  Loans  on  farm  lands.) 
Federal  Advisory  Council: 

Creation    12 


INDEX  TO  ACT  169 

8ECTI0K 

Members    13 

Meetings    12 

Powers    12 

Vacancies,  how   filled 12 

Federal  Reserve  Agent: 

Appointment    4 

Assistants   4 

Bond    11-i 

Compensation    4 

Deposits   with    16 

Deposits  by,  with  Secretary  of  Treasury 16 

Duties  in  general 4 

Holding  deposits  required  by  Federal  Reserve  Act ....  16 

Holding  money  for  redemption  of  Federal  reserve  notes  16 
Notice  to  board  of  issuance  and  withdrawal  of  Federal 

reserve  notes   16 

Office    4 

Qualifications   4 

Redeposit  of  money  deposited  with  him  with  Board  or 

Treasurer    16 

Reports    4 

Federal  Reserve  Banks: 

Absence  of  chairman  or  deputy  chairman 4 

Accounts  with  other  Federal  Reserve  Banks 14 

Advances  to  members  13 

Assessments  by  Federal  Reserve  Board  for  expenses..  10 

Authority  to  commence  business 4 

Banks  in  Alaska  and  dependencies  and  possessions  may 

become  members  19 

Board  of  directors.     (See  also  Directors) 4 

Chairman  of  board  of  directors 4 

Clearing  and  collection  charges  regulated  by  Federal 

Reserve  Board    16 

Clearing  checks  16 

Collections 13 

Deposits 13 

Deputy  chairman  of  board  of  directors 4 

Designation    3 

Directors.     (See  Directors.) 

Discoimts  for  member  banks 13 

Dividends    7 

Exemptions   from  taxation 7 

Fiscal  agents  15 

Forfeiture  of  membership  in 9 

Foreign  accounts    14 

Foreign  agencies 14 

Franchise  tax    7 


170  INDEX  TO  ACT 

SECTION 

Information  to  be  furnished  Federal  Reserve  Board ...  21 

Initial  capital 2 

Liquidation   7 

Location    2 

Name    2 

Officers,  ineligibility  of  Senators  and  Representatives..  4 

One  in  each  reserve  city 2 

Open  market   operations 14 

Organization  2 

Powers   13 

Rediscounts.     (See  Rediscounts.) 
Shareholders.     (See  Shareholders.) 

Special  examinations  of  members 21 

Stock.     (See  Stock.) 

Supervision  by  Federal  Reserve  Board 11-j 

Surplus,  additions  to  from  net  earnings 7 

Surplus  left  upon  liquidation  goes  to  United  States. ...  7 

Suspension  or  liquidation  by  Federal  Reserve  Board...  11-h 

Suspension  or  removal  of  ofl&cers  and  directors 11-f 

Title    2 

Weekly   statement   of  conditions   by   Federal   Reserve 

Board    11-a 

Writing  off  doubtful  assets 11-g 

Federal  Reserve  Board: 

Additional  limitations  on  farm  loans 24 

Allotment  of  refunding  bonds 18 

Annual  report  10 

Applications  for  cancellation  of  stock 9 

Appointment  of  class  C  directors  by 4 

Appointment  of  Federal  Reserve  Agent  by 4 

Appointment  of  members 10 

Approval  of  directors'  compensation 4 

Assessments  against  Federal  Reserve  Banks  to  pay  ex- 
penses    10 

Chairman,  Secretary  of  Treasury  ex  officio 10 

Clearing  house  may  act  as 16 

Creation  of  new  districts 2 

Deposits  with  Secretary  of  Treasury  subject  to  order  16 

of    16 

Designation  or  requirement  of  Federal  Reserve  Bank 

to  act  as  clearing  house 16 

Ex  officio  members 10 

Expenses   10 

Expenses  of  handling  deposits  with  Secretary  of  Treas- 
ury      16 

Expenses  of  money  shipments 16 

Federal  Reserve  notes,  regulation  of  issue 16 


I 


INDEX  TO  ACT  171 

BKCnON 

First  meeting 10 

Governor — 

Appointment    10 

Duties    10 

Members — 

Appointment    10 

Expenses     . .; 10 

Ineligible    for    oflSce    or   employment   in   member 

banks  or  with  Federal  reserve  banks 10 

No  two  from  same  district 10 

Qualifications   10 

Salary    10 

Shall  devote  entire  time  to  business  of  board 10 

Term  of  office  10 

Number  of  members   10 

Offices    10 

Powers   11 

Powers  in  conflict  with  those  of  Secretary  of  Treasury  10 

Readjustment  of  districts  2 

Regulations — 

Charges    for   collections 16 

Checking  against  reserve  and  member  banks 19 

Clearing-house  activities  16 

Dealings  in  commercial  paper 13 

Foreign  branches   25 

Rates  of  discount 14 

Rediscounts    11-b,  13 

Transfers  of  stock 2 

Removal  of  Federal  Reserve  Bank  officers  or  directors  11-f 

Reports  of   10 

Representation  by  members  of  commercial,  industrial, 

and  geographical  divisions  of  coimtry 10 

Representatives  in  Congress  ineligible 4 

Review  of  organization  committee's  determinations 2 

Secretary  of  Treasury  ex  officio  chairman 10 

Senators  ineligible   '4 

StaflF,  employment  and  expenses  of 11-1 

Supervision  of  Federal  Reserve  Banks 11-j 

Supervision  of  foreign  accounts 14 

Suspension  of  reserve  requirements 11-c 

Vacancies,  how  filled    10 

Vice  governor   10 

"Weekly    statement    of    condition    of    Federal    Reserve 

Banks  11-a 

Federal  reserve  cities: 

Designation    9 

Number 3 


172  INDEX  TO  ACT 

BECnOK 

Review  of  organization  committee's  determination 2 

Selection  of 2 

Federal  reserve  districts: 

Apportionment    2 

Creation     3 

Creation  of  new  districts 9 

Designation    2 

Original  number   2 

Readjustment 2 

Total  number 2 

Federal  reserve  notes: 

Additional  security  may  be  required 16 

Cancellation  and  destruction 16 

Collateral  security   16 

Custody,  pending  issue 16 

Custody,  plates  and  dies 16 

Deposits  against  16 

Deposits  with  Treasurer  to  cover  redemptions 16 

Discretion  of  Board  to  grant  application  for  issue 16 

Distinctive  letter  and  number 16 

Engraving  and  printing  16 

Expenses  of  issue  and  retirement 16 

Interest  on  16 

Issue  16 

Lien  on  assets  of  bank 16 

Must  not  be  paid  out  by  Federal  Reserve  Bank  not  is- 
suing them    16 

Notice  to  Board  of  issues  and  withdrawals 16 

Power  of  bank  to  issue 4 

Purposes  for  which  issued 16 

Redemption  of 16 

Reduction  of  liability  for 16 

Reserve   against    16 

Retirement  of   16 

Return  or  retirement  by  another  Federal  Reserve  Bank  16 

Status   as   currency 16 

Supervision  and  control  of  issue  and  retirement 11-d 

Tax  on  deficiency  in  gold  reserve 11-c 

Withdrawal  of  collateral 16 

Fiduciary  powers,  national  banks 11-k 

Foreign  accounts,  Federal  Reserve  Banks 14 

Foreign  agencies.  Federal  Reserve  Banks 14 

Foreign  branches: 

Accounts  kept  separate 25 

Agreement  to  comply  with  regulations  of  Federal  Re- 
serve Board   25 

Application  to  establish 25 


INDEX  TO  ACT  173 

Establishment    35 

Failure  to  comply  with  regulations 25 

Information  must  be  furnished 25 

Investigation  by  Federal  Reserve  Board  of  failure  to 

comply  with  regulations 25 

May  be  appointed  fiscal  agents  of  United  States 25 

National  banks  may  establish 25 

Officers  or  employees  of  member  banks  may  serve....  25 

Special    examinations    25 

Forfeitures.     (See  Penalties  and  forfeitures.) 

Franchise  tax: 

Secretary  of  Treasury  to  maintain 26 

Tax  on  deficiency    11-c 

G 

Government  deposits: 

Funds  to  be  deposited 15 

In  Federal  Reserve  Banks 15 

In  member  banks 15 

I 

Inconsistent  laws  repealed 26 

Invalidity  of  part  of  act  not  to  invalidate  all 29 

L 

Loans  on  farm  lands: 

Amount    24 

Limitations  may  be  added  by  Federal  Reserve  Board.  24 

National  banks  not  in  Central  Reserve  cities  may  make  24 

Time  to  run 24 

M 

Member  banks: 

Acceptances  by 13 

Banks  in  Alaska  or  other  dependencies  or  possessions 

may  become  members 19 

Cancellation  of  stock  in  Federal  Reserve  Bank  upon 

insolvency    6 

Definition 1 

Discount  of  paper  for  directors,  officers,  or  employees  22 

Examinations  of,  by  Federal  Reserve  Board 11-a 

Fees  or  commissions  to  officers  or  directors  for  loans 

prohibited    22 

Forfeiture  of  membership 9 

Increasing  capital  stock  must  increase  holdings  of  Fed- 
eral Reserve  Banks'  stock 5 

Insolvency    6 


174  INDEX  TO  ACT 

Interest  on  deposits  of  officers,  directors,  or  employees  22 
Limitations   on   amount   of   deposits   with   nonmember 

banks    19 

Loans  or  gratuities  to  bank  examiners  prohibited 22 

Officers  and  employees  may  serve  foreign  branches 25 

Reserves  of.     (See  "Reserves") 19 

Sale  of  bonds  securing  notes  to  be  retired 18 

Shall  make  no  new  loans  or  dividends  while  reserve  not 

maintained    19 

Shall  not  act  as  medium  of  nonmember  banks  in  secur- 
ing discounts  from  Federal  Reserve  Banks  without 

consent  of  Federal  Reserve  Board 19 

Stock  in  Federal  Reserve  Banks  not  to  be  transferred  5 
Surrender  of  stock  in  Federal  Reserve  Banks  upon  re- 
duction of  its  own  capital  or  upon  liquidation 5 

Visitatorial  powers  to  which  subject 21 

N 

National  banks: 

Acceptance  of  terms  of  Federal  Reserve  Act 2 

Bond  deposit  requirements  repealed 17 

Converted  from  State  banks 8 

Definition    1 

Directors  personally  liable  for  results  of  noncompliance 

with  act  2 

Dissolution  for  noncompliance  with  act 2 

Foreign  branches.     (See  Foreign  branches.) 

Indebtedness  limited   13 

Loans  on  farm  lands 24 

May  act  as  insurance  agent  or  broker,  when 13 

Penalty  for  failing  to  accept  terms  of  act 2 

Personal  liability  of  stockholders 23 

Reduction  of  capital  stock 28 

Subscription  to  capital  stock  of  Federal  Reserve  Banks  2,  4 

Survival  of  remedies  and  penalties  against 2 

Transfer  of  shares  before  failure 23 

Trustees,  executors,  administrators,  and  registrars  of 

stocks  and  banks 11-k 

National  Banking  Association,   definition 1 

Notes.     (See  Federal  Reserve  notes.) 

Notes  against  bonds  purchased: 

May  be  issued  by  Federal  Reserve  Banks 18 

Issue  and  redemption 18 

Limitations  on  amounts 18 

O 

Organization  committee.     (See  Reserve  bank  organization 
committee.) 


INDEX  TO  ACT  176 
P 

Penalties  and  forfeitures: 

Certified  checks  against  insufficient  funds 9 

Examiners  disclosing  confidential  information 22 

Failure  of  State  bank  to  make  reports 9 

Forfeiture  of  membership 9 

Loans  or  gratuities  to  examiners 22 

Noncompliance  with  act 2 

Penalty  against  Federal  Reserve  Bank  for  paying  out 

notes  of  another 16 

Survival  of  penalties  against  dissolved  banks 2 

Public  stock: 

Definition    2 

Limitation  of  amount  held  by  single  shareholder 2 

Subscription  to   2 

Transfer  of   2 

R 

Rediscounts : 

Acceptances    13 

Agricultural  paper 13 

Conditions  of  9 

Limitations    on   amount 13 

Limitations  on  amounts  for  State  banks 9 

Paper  subject  to 13 

Regulation  by  Federal  Reserve  Board 11-b,  13 

Remedies,  survival  against  dissolved  bank 2 

Repayment  of  deposits  upon  withdrawal  of  State  banks ...  9 
Reports: 

By  State  banks 9 

Federal  Reserve  Board.    (See  Federal  Reserve  Board.) 
Reserves : 

Banks  in  Alaska,  dependencies  or  possessions 20 

Federal  Reserve  Bank — 

Against  deposits  16 

Against  Federal  reserve  notes 16 

Gold  deposits  may  be  counted  as  part  of 16 

How  maintained  16 

Member  banks — 

Amount  required    19 

Computation  of  balances 19 

How  maintained  19 

May  be  checked  against 19 

Limitation  on  amount  deposited  with  nonmember 

bank    19 

Must  be  maintained 19 

Permission  to  carry  in  Federal  reserve  banks  instead 
of  in  vault 11-m 


176  INDEX  TO  ACT 

Suspension  of  Reserve  requirements  by   Federal   Re- 
serve Board   11-c 

Tax  upon  delinquencies   11-c 

Reserve  bank  (see  also  Federal  Reserve  Bank),  definition.  1 

Reserve  Bank  Organization  Committee: 

Allotment  of  United  States  stock 2 

Calling  meetings  of  bank  directors 4 

Certificates  of  designation  of  reserve  districts  and  re- 
serve cities  4 

Exercise  functions  of  chairman  of  board  of  directors 

of  Federal  Reserve  Banks  pending  organization '4 

Expenses   2 

Fixing  geographical  limits  of  districts 2 

General  powers  2 

Offer  of  stock  to  public  subscribers 2 

Quorum    2 

Supervision  of  organization  of  Federal  Reserve  Banks  2 

Reserve  cities: 

Control  of  classification  by  Federal  Reserve  Board 11-e 

Previous  status  not  changed 2 

S 

Secretary  of  Treasury: 

Deposits  with,  by  Federal  Reserve  Bank  or  agent 16 

Ex  officio  member  of  Federal  Reserve  Board 10 

Expenses  of  handling  deposits 16 

Gold  reserve  to  be  maintained  by 26 

Management  of  United  States  stock 2 

Shareholders  (see  also  Stock),  individual  liability: 

Federal  Reserve  Banks 2 

National  banks   23 

State  banks: 

Cancellation  of  stock  in  Federal  Reserve  Bank 9 

Certificates  as  to  liabilities  of  debtors 9 

Certifying  checks  against  insufficient  funds 9 

Conditions  of  membership 9 

Converted  into  national  banks 8 

Eligibility  for  membership 9 

Examination.     (See  "Examinations") 9 

Examinations,  not  subject  to  requirements  of  section  21  9 

Forfeiture  of  membership 9 

May  become  members  of  Federal  Reserve  Bank 9 

Must  be  eligible  for  conversion  into  national  banks ...  9 

Penalties  for  failure  to  make  reports 9 

Qualifications  required  to  become  members 9 

Regulations 9 

Retain  powers  under  State  charters 9 

State  examinations  may  be  accepted 9,  21 


INDEX  TO  ACT  177 

Subject  to  provisions  and  penalties  of  Revised  Statutes 

5209,  upon  becoming  members 9 

Subject  to  section  of  Federal  Reserve  Act  applied  to 

member  banks;  but  not  subject  to  section  21 9 

Subscription  to  stock  in  Federal  Reserve  Banks 9 

Withdrawal  from  membership 9 

Stock: 

(see  also  Shareholders.) 

Of  Federal  Reserve  Banks — 

Amount  to  be  held  by  single  member  or  shareholder  2 

Calls  on  subscriptions 2 

Cancellation   of   stock   held   by   insolvent   member 

banks    6 

Increase  5 

Increase  of  subscriptions  required  on  increase  of 

member  banks'  capital  stock 5 

Limitation  on  cancellations 9 

National  banks  must  subscribe 2 

Payments  on  subscriptions 2 

Public  subscriptions 2 

Reduction    6 

Shares  owned  by  member  banks  not  to  be  transfer- 
red      5 

Subscription    2 

Subscription  by  national  banks 2,  4 

Subscription  by  State  banks 9 

Subscription  required  of  new  members 5 

Surrender  upon  reduction  of  capital  or  liquidation 

of  member  banks 5 

Transfer   of    2 

Voting  power    2 

Of  member  banks — 

Increase    5 

Reduction 5 

Of  national  banks — 

Reduction    38 

Transfer  of  before  failure 23 

Surplus.     {See  Federal  Reserve  Banks.) 

T 

Tax  upon  delinquencies  in  reserves .-  11-c 

Time  deposits,  definition 19 

Trust  companies,  acceptance  of  terms  of  Federal  Reserve 

Act    2 

Trust  powers  of  national  banks 11-k 

U 
United  States  stock: 

Allotment   by   organization   committee 9 

Management  by  Secretary  of  the  Treasury 9 


INDEX  TO  TEXT 

Acceptances,  trade   acceptances   and  bank   acceptances,  may  be 

purchased   by    federal   reserve   banks   in   open   market,   42-43; 

may   be    rediscounted   by    federal    reserve    banks,    44-47.    See 

also  bank  acceptances  and  trade  acceptances. 
Advisory  Council,  how  constituted,  34. 
Agricultural   paper,   eligible    for    rediscoimt    at    federal    reserve 

banks,  62. 
Bank  acceptances,  nature  of,  46 ;  advantages  of,  46-47 ;  rediscount- 
able  by  federal  reserve  banks,  47;  use  of,  in  connection  with 

foreign  trade,  79-80. 
Bank  credit,  extent  to  which  used  as  a  medium  of  exchange  in 

1913,  8-10. 
Bank  note,  bond-secured,  under  federal  reserve  law,  50-51 ;  federal 

reserve  bank  note,  51.     See  also  federal  reserve  note  and  bank 

reserves. 
Bank-note  inelasticity,  under  old  banking  system,  11-17;  seasonal, 

chart  showing,  16. 
Branches  of  national  banks,  may  be  established  in  foreign  countries 

80-81. 
Canadian  bank  notes,  elasticity  of,  c^pared  with  that  of  U.  S. 

national  bank  notes,  15-16.  '^' 

Capital  of  federal  reserve  banks,  minimum  amount  of,  29;  amount 

paid-in,  31;  how  subscribed,  31. 
Centralization    of    bank    reserves    in    respective    federal    reserve 

districts,  35-38. 
Central  reserve  city  banks,  reserve  requirements  of,  37. 
Class  A  directors  of  federal  reserve  banks,  who  and  how  elected, 

32. 
Class  B  directors  of  federal  reserve  banks,  who  and  how  elected, 

S2. 
Class  C  directors  of  federal  reserve  banks,  who  and  how  chosen, 

32-33. 
Clearing-member  banks,  defined,  70. 
Clearing  out-of-town  checks,  under  old  banking   system,   19-22; 

under  federal  reserve  system,  70-74;  charges  permissible  for,  73; 

cost  of,  how  met  and  apportioned  among  participating  banks, 

73-74;  system  extended  to  cover  promissory  notes,  trade  bills, 

time  drafts  and  similar  items,  75;  services  rendered  by  system, 

78-79. 

178 


INDEX   TO   TEXT  179 

Collateral  loans,  character  of,  which  may  be  made  by  federal 
reserve  banks,  62-63. 

Collection  of  out-of-town  checks.    See  clearing  out-of-town  checks. 

Commercial  paper,  creation  of  a  broader  discount  market  for, 
44-48;  kinds  of,  eligible  for  rediscoxmt  by  federal  reserve  banks, 
61-62. 

Comptroller  of  the  currency  an  ex-officio  member  of  federal  re- 
serve board,  33. 

Contractility  of  circulating  credit  under  federal  reserve  system, 
64-65. 

Country  banks,  reserve  requirements  of,  37. 

Credit  elasticity  under  federal  reserve  system,  50-65. 

Credit  inelasticity  under  old  banking  system,  evil  results  of,  18. 

Currency  shipments,  heavy  under  old  banking  sjjstem,  22-23;  may 
be  made  by  member  banks,  at  expense  of  federal  reserve  banks, 
to  settle  adverse  balances  arising  out  of  clearing  and  collection 
system,  72. 

Decentralization  of  American  banking  prior  to  federal  reserve 
system,  3-7. 

Defects  of  old  banking  system  summarized,  2. 

Deposit  currency,  inelasticity  of,  under  old  system,  17;  elasticity 
of,  under  federal  reserve  system,  57-65. 

Deposit-turnover,  rate  of,  in  1913,  9-10. 

Depositaries,  government,  apportionment  of  funds  among,  under 
old  banking  system,  25-27;  use  of  federal  reserve  banks  as, 
82-89;  use  of  individual  banks  as,  during  war,  87. 

Directors  of  federal  reserve  banks,  classes  of,  32-33, 

Discount  market,  a  broader  one  being  created  by  federal  reserve 
system,  44-48. 

Discount  rates  of  federal  reserve  banks,  how  made  effective, 
42n;  tendency  of,  to  equilibrium  throughout  country,  43-44. 

Domestic  exchange  under  federal  reserve  system,  66-79. 

Elasticity,  credit,  under  old  banking  system,  8-18;  under  federal 
reserve  system,  50-65.  See  also  bank-note  inelasticity  and 
deposit-currency  inelasticity. 

Exchange  and  transfer  system,  defective  prior  to  federal  reserve 
system,  19-24;  under  federal  reserve  system,  66-81. 

Exchange  charges,  imposed  by  federal  reserve  banks  on  member 
banks  to  cover  expenses  of  clearing  and  collection  system,  73-74; 
reduced  since  inauguration  of  federal  reserve  clearing  and  col- 
lection system,  73;  reasonableness  of,  to  be  determined  by  fed- 
eral reserve  board,  74. 

Federal  reserve  agent,  position  of,  33. 

Federal  reserve  agents'  fimd,  described,  76. 

Federal  reserve  bank  agencies  in  foreign  countries,  80. 

Federal  reserve  banks,  capital  stock  of,  31;  subscriptions  to,  re- 


180  INDEX  TO  TEXT 

quired  of  member  banks,  31;  plan  of  organization  of,  31-32; 
the  sole  depositaries  of  member  banks'  legal  reserve  money, 
35-38. 

Federal  reserve  bank  notes,  described,  51. 

Federal  reserve  board,  how  constituted,  33-34;  powers  of,  34; 
may  permit  reserve  held  against  federal  reserve  notes  to  fall 
below  '40  per  cent  in  times  of  emergency,  53;  must  impose  a 
deficiency  tax  when  reserve  falls  below  40  per  cent,  53;  may 
suspend  for  brief  periods,  in  times  of  emergency,  all  reserve 
requirements  of  act,  53;  may  impose  a  special  rate  of  interest 
on  issues  of  federal  reserve  notes  uncovered  by  gold,  56. 

Federal  reserve  clearing  and  collection  system,  70-79. 

Federal  reserve  districts,  how  determined,  28-29;  map  of,  30. 

Federal  reserve  notes,  described,  51;  collateral  eligible  for,  in 
hands  of  federal  reserve  agent,  51-52;  gold  reserve  required 
against,  52;  elasticity  of,  52-57;  legal  minimum  reserve  for, 
may  be  reduced  in  time  of  emergency,  on  payment  of  a  gradu- 
ated deficiency  tax,  53;  amount  of,  outstanding,  and  character 
of  collateral  held  against,  54;  possibility  of  further  expansion 
of,  54-55;  of  one  federal  reserve  bank  may  not  be  paid  out  by 
another,  55-56;  machinery  for  contracting  circulation  of,  ques- 
tion of  its  adequacy,  55-57. 

Fiscal  agents  of  Government,  federal  reserve  banks  serve  as,  88; 
render  valuable  services  as,  in  war  financing,  88. 

Fisher,  Irving,  cited,  9,  57. 

"Float,"  how  handled  under  old  banking  system,  20-22;  evils  of, 
largely  eliminated  by  federal  reserve  clearing  and  collection 
system,  71-73,  78. 

Foreign  agencies  established  by  federal  reserve  banks,  80. 

Foreign  branches  of  American  national  banks  established,  80-81. 

Foreign  exchange,  difficulties  with,  prior  to  federal  reserve  sys- 
tem, 23-24;  under  federal  reserve  system,  79-81;  services  with 
reference  to,  rendered  by  federal  reserve  system,  79-81. 

Gold,  amount  of,  held  against  federal  reserve  note  issues,  54, 

Gold  reserve  required  against  federal  reserve  notes,  may  be  re- 
duced in  time  of  emergency,  53. 

Gold  settlement  fund,  described,  76. 

Government,  old  banking  system  ill  adapted  to  fiscal  needs  of, 
25-27;  participation  of,  in  profits  of  federal  reserve  banks,  59. 

Government  depositaries,  federal  reserve  banks  serve  as,  82-86; 
banks  which  serve  as,  under  war  conditions,  86-87. 

Inelasticity  of  bank  notes  under  old  banking  system,  11-17;  charts 
showing,  14-15. 

Inelasticity  of  credit  under  old  banking  system,  8-18;  evil  results 
of,  18. 

Inelasticity  of  deposit  credit  under  old  banking  system,  17. 

Interest,  a  special  rate  of,  may  be  imposed  by  federal  reserve 


I 


INDEX  TO  TEXT  181 

board  on  issues  of  federal  reserve  notes  uncovered  by  gold,  5S. 
See  also  discount  rates, 

Kinley,  David,  cited,  9. 

Leadership,  absence  of,  for  country's  banks  in  times  of  emer- 
gency prior  to  federal  reserve  act,  3-4. 

Legal  reserve,  see  reserves. 

Liberty  bond  financing  by  federal  reserve  banks,  88;  extensive 
use  of  collateral  loans  in,  63. 

Live-stock  paper  eligible  for  rediscount  at  federal  reserve  banks, 
62. 

London,  the  financing  of  a  declining  proportion  of  our  foreign 
trade  through,  as  a  result  of  federal  reserve  system,  79-80. 

Membership  in  federal  reserve  system,  29-31;  importance  of,  in 
time  of  war,  88-90;  President  Wilson  urges  on  non-member 
banks  as  a  patriotic  duty,  89-90. 

Member  banks  must  purchase  stock  in  federal  reserve  bank,  31; 
are  grouped  into  three  classes  for  electing  federal  reserve  bank 
directors,  32. 

Mobility  of  reserves,  inter-district,  39-48;  intra-district,  48. 

Mobilization  of  reserves  under  federal  reserve  system,  38-39. 

National  banks,  as  depositaries  of  government  funds,  26-27;  must 
join  federal  reserve  system,  29. 

National  bank  notes  under  federal  reserve  law,  50-51. 

Open-market  operations  of  federal  reserve  banks,  41-44. 

Out-of-town  checks,  see  clearing  and  collection  system,  "float," 
and  "routing  of  checks." 

Par-clearing  and  collection  system,  description  of,  70-75;  mem- 
bership in,  70. 

Profits  of   federal  reserve  banks,  how  distributed,  59. 

Promissory  notes,  collectible  under  federal  reserve  clearing  and 
collection  system,  75. 

Rediscounting,  negligible  under  old  banking  system,  17;  by  one 
federal  reserve  bank  for  another,  the  law,  39-41;  the  practice, 
41;  by  federal  reserve  banks,  kinds  of  paper  eligible  for,  61-62; 
facilities  for,  at  federal  reserve  banks,  not  open  to  paper  drawn 
for  dealing  in  stocks  or  bonds  (other  than  U.  S.  government 
bonds),  62. 

Reserve,  gold,  required  against  federal  reserve  notes,  may  be 
reduced  in  time  of  emergency,  53. 

Reserve  agents,  national  banks  discontinued  as,  by  federal  re- 
serve law,  35-57. 

Reserve  city  banks,  reserve   requirements   of,  37. 

Reserves,  cash,  importance  of,  in  old  banking  system,  4;  scattered 
prior  to  federal  reserve  system,  and  therefore  ineflfective,  4-7; 
immobile  under  old  banking  system,  7 ;  deposited  in  reserve  and 
central  reserve  city  banks  dilficult  to  realize  upon,  in  times  of 
emergency,  4-7;  district  centralization  of,  under  federal  reserve 


182  INDEX  TO  TEXT 

system,  35-38;  legal,  percentages  required  of  member  banks,  37; 
mobilization  of,  mider  federal  reserve  system,  38-38;  of  member 
banks,  legal,  must  all  be  kept  on  deposit  in  federal  reserve 
banks,  35-38;  inter-district,  mobility  of,  39-48;  legal,  against 
deposits  of  federal  reserve  banks,  58-59;  intra-district,  mobility 
of,  48;  legal,  requirements  for,  less  rigid  under  federal  reserve 
law  than  formerly,  58;  legal,  against  federal,  reserve  deposits, 
may  be  reduced  in  times  of  emergency,  60;  of  member  banks, 
how  increased  by  rediscounting  with  federal  reserve  banks, 
60-61. 

Routing  of  checks,  under  old  regime,  21-23;  how  practice  padded 
reserves,  22;  evils  of,  largely  eliminated  by  federal  reserve  sys- 
tem, 73,  78. 

Secretary  of  Treasury,  difficult  task  of,  of  apportioning  government 
funds  among  depositaries,  under  old  banking  system,  26-27;  an 
ex-officio  member  of  federal  reserve  board  and  chairman,  33. 

Speculation,  paper  used  for,  not  rediscountable  or  purchaseable 
by  federal  reserve  banks,  62. 

State  banks  and  trust  companies,  may  join  federal  reserve  sys- 
tem, 29 ;  urged  by  President  Wilson  to  join  system  as  a  patriotic 
duty,  89-90. 

Sterling  bills,  decline  in  relative  importance  of,  as  compared  with 
bills  drawn  in  dollars,  79-80. 

Subtreasuries  as  depositaries  of  government  funds,  25-26. 

Tax,  graduated  deficiency,  on  reserve  held  against  federal  reserve 
notes,  53;  graduated,  to  be  imposed  upon  deficiency  in  legal 
reserve  against  deposits  of  federal  reserve  banks,  60. 

Trade  acceptances,  character  of,  44-45;  advantages  of,  45-46. 

Trade  bills  collectible  under  federal  reserve  clearing  and  collec- 
tion system,  75. 

United  States  Government  bonds  and  notes,  paper  used  for  pur- 
chasing, rediscountable  at  federal  reserve  banks,  62.  See  also 
government. 

WiUis,  H.  Parker,  cited,  68. 

Wilson,  President,  appeals  to  non-member  banks  to  join  federal 
reserve  system  as  a  patriotic  duty,  89-90. 


14  DAY  USE 

RETURN  TO  DESK  FROM  WHICH  BORROWED 
LOAN  DEPT. 

This  book  is  due  on  the  last  date  stamped  below,  or 

on  the  date  to  which  renewed. 

Renewed  books  are  subject  to  immediate  recall. 


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